PENNSYLVANIA POWER COMPANY

                       2002 ANNUAL REPORT TO STOCKHOLDERS



          Pennsylvania  Power  Company  (Penn),  an electric  utility  operating
company of  FirstEnergy  Corp.  and a wholly  owned  subsidiary  of Ohio  Edison
Company, provides electric service to approximately 155,000 customers in western
Pennsylvania.






Contents                                                                Page
--------                                                                ----

Selected Financial Data.........................................          1
Management's Discussion and Analysis............................         2-10
Statements of Income............................................         11
Balance Sheets..................................................         12
Statements of Capitalization....................................         13
Statements of Common Stockholder's Equity.......................         14
Statements of Preferred Stock...................................         14
Statements of Cash Flows........................................         15
Statements of Taxes.............................................         16
Notes to Financial Statements...................................        17-27
Reports of Independent Accountants..............................        28-29



<PAGE>


<TABLE>
<CAPTION>


                                             PENNSYLVANIA POWER COMPANY

                                              SELECTED FINANCIAL DATA


                                                2002            2001            2000          1999            1998
---------------------------------------------------------------------------------------------------------------------
                                                                      (Dollars in thousands)

<S>                                            <C>             <C>            <C>          <C>               <C>
Operating Revenues......................       $506,407        $498,401       $383,112     $  329,234        $323,756
                                               ========        ========       ========     ==========        ========

Operating Income........................       $ 60,922        $ 55,178       $ 39,979     $   32,063        $ 58,041
                                               ========        ========       ========     ==========        ========

Income Before Extraordinary Item........       $ 47,717        $ 41,041       $ 22,847     $   12,648        $ 39,748
                                               ========        ========       ========     ==========        ========

Net Income..............................       $ 47,717        $ 41,041       $ 22,847     $   12,648        $  9,226
                                               ========        ========       ========     ==========        ========

Earnings on Common Stock................       $ 44,018        $ 37,338       $ 19,143     $    8,278        $  4,600
                                               ========        ========       ========     ==========        ========

Total Assets............................       $907,748        $960,097       $988,909     $1,015,616        $977,772
                                               ========        ========       ========     ==========        ========

CAPITALIZATION AT DECEMBER 31:
Common Stockholder's Equity.............       $229,374        $223,788       $213,851     $  199,608        $275,281
Preferred Stock-
   Not Subject to Mandatory Redemption..         39,105          39,105         39,105         39,105          50,905
   Subject to Mandatory Redemption......         13,500          14,250         15,000         15,000          15,000
Long-Term Debt..........................        185,499         262,047        270,368        274,821         287,689
                                               --------        --------       --------     ----------        --------
Total Capitalization....................       $467,478        $539,190       $538,324     $  528,534        $628,875
                                               ========        ========       ========     ==========        ========

CAPITALIZATION RATIOS:
Common Stockholder's Equity.............           49.1%           41.5%          39.7%          37.8%           43.8%
Preferred Stock-
   Not Subject to Mandatory Redemption..            8.3             7.3            7.3            7.4             8.1
   Subject to Mandatory Redemption......            2.9             2.6            2.8            2.8             2.4
Long-Term Debt..........................           39.7            48.6           50.2           52.0            45.7
                                                  -----           -----          -----          -----           -----
Total Capitalization....................          100.0%          100.0%         100.0%         100.0%          100.0%
                                                  =====           =====          =====          =====           =====

DISTRIBUTION KILOWATT-HOUR DELIVERIES
(Millions):
Residential.............................          1,533           1,391          1,387          1,325           1,278
Commercial..............................          1,268           1,220          1,198          1,105           1,069
Industrial..............................          1,505           1,540          1,665          1,495           1,439
Other...................................              6               6              6              6               6
                                                  -----          ------          -----          -----           -----
Total...................................          4,312           4,157          4,256          3,931           3,792
                                                  =====           =====          =====          =====           =====

CUSTOMERS SERVED:
Residential.............................        136,410         134,956        121,066        117,440         124,304
Commercial..............................         18,397          18,153         16,634         16,307          16,924
Industrial..............................            220             224            177            175             206
Other...................................             85              87             87             87              86
                                                -------         -------        -------        -------         -------
Total...................................        155,112         153,420        137,964        134,009         141,520
                                                =======         =======        =======        =======         =======

NUMBER OF EMPLOYEES.....................            201             256            275            895             888

                                                         1


</TABLE>


<PAGE>


                           PENNSYLVANIA POWER COMPANY

                           MANAGEMENT'S DISCUSSION AND
                        ANALYSIS OF RESULTS OF OPERATIONS
                             AND FINANCIAL CONDITION


          This  discussion   includes   forward-looking   statements   based  on
information  currently  available to management that is subject to certain risks
and uncertainties.  Such statements  typically contain,  but are not limited to,
the terms anticipate,  potential,  expect, believe,  estimate and similar words.
Actual  results may differ  materially  due to the speed and nature of increased
competition  and  deregulation  in the electric  utility  industry,  economic or
weather  conditions  affecting future sales and margins,  changes in markets for
energy services,  changing energy and commodity  market prices,  legislative and
regulatory  changes  (including  revised  environmental  requirements),  and the
availability and cost of capital.

Corporate Separation
--------------------

          In connection with  FirstEnergy's  Ohio transition  plan,  FirstEnergy
separated its  businesses  into three  distinct  units - a competitive  services
segment,  a regulated services segment and a corporate support services segment.
Pennsylvania  Power Company (Penn) is included in the regulated services segment
which  continues to deliver power to homes and  businesses  through its existing
distribution system and maintains the "provider of last resort" (PLR) obligation
under its rate plan.


          Beginning on January 1, 2001, FirstEnergy's electric utility operating
companies  (EUOC)  entered  into power  supply  agreements  whereby  FirstEnergy
Solutions Corp. (FES) purchases all of the EUOC nuclear  generation,  as well as
generation  from leased fossil  generation  facilities.  FirstEnergy  Generation
Corp.  (FGCO), a wholly owned subsidiary of FES, leases fossil  generating units
owned by the EUOC. We are a "full requirements"  customer of FES to enable us to
meet our PLR responsibilities in our service area.

          The  effect on Penn's  reported  results  of  operations  in 2001 from
FirstEnergy's  corporate  separation plan and our sale of transmission assets to
American  Transmission Systems, Inc. (ATSI) in September 2000, are summarized in
the following table:

<TABLE>
<CAPTION>


    Corporate Restructuring - 2001 Income Statement Effects
    -------------------------------------------------------
    Increase (Decrease)
                                                Corporate
                                                Separation         ATSI             Total
                                                ----------         ----             -----
                                                                (In millions)
    <S>                                            <C>            <C>               <C>
    Operating Revenues:
      Power supply agreement with FES........      $151.5         $ --              $151.5
      Generating units rent..................        20.2           --                20.2
      Ground lease with ATSI.................        --             0.6                0.6
    --------------------------------------------------------------------------------------
      Total Operating Revenues Effect........      $171.7         $ 0.6             $172.3
    ======================================================================================
    Operating Expenses and Taxes:
      Fossil fuel costs......................      $(32.6)(a)     $ --              $(32.6)
      Purchased power costs..................       152.7(b)        --               152.7
      Other operating costs..................       (21.1)(a)       4.9 (d)          (16.2)
      Provision for depreciation and
        amortization ........................         --           (2.2)(e)           (2.2)
      General taxes..........................        (2.4)(c)      (0.3)(e)           (2.7)
      Income Taxes...........................        31.1          --                 31.1
    --------------------------------------------------------------------------------------
      Total Operating Expenses Effect........      $127.7         $ 2.4             $130.1
    ======================================================================================
    Other Income.............................      $ --           $ 1.7 (f)         $  1.7
    ======================================================================================


<FN>

 (a) Transfer of fossil operations to FGCO.
 (b) Purchased power from power supply agreement (PSA).
 (c) Payroll taxes related to employees transferred to FGCO.
 (d) Transmission services received from ATSI.
 (e) Depreciation and property taxes related to transmission assets sold to ATSI.
 (f) Interest on note receivable from ATSI.

</FN>
</TABLE>


Results of Operations
---------------------

          Earnings on common stock in 2002 increased 17.9% to $44.0 million from
$37.3 million in 2001.  The earnings  increase in 2002  primarily  resulted from
increased  operating  revenues and lower financing  costs,  which were partially
offset  by  higher  operating  expenses  and taxes  and  reduced  other  income.
Excluding  the  effects  shown in the table

                                       2

<PAGE>

above,  earnings on common  stock  decreased  to $6.6 million in 2001 from 2000,
being adversely  affected by reduced  operating  revenues,  which were partially
offset by lower operating expenses, taxes and net interest charges.

          Operating  revenues  increased  by  $8.0  million  or  1.6% in 2002 as
compared  to 2001.  The return of  customers  previously  served by  alternative
generation suppliers  contributed to the revenue increase.  Retail kilowatt-hour
sales  increased  by 7.8% in 2002 from the prior  year,  with  increases  in the
residential and commercial  sectors  contributing to a $15.8 million increase in
generation sales revenue.  Sales of electric generation by alternative suppliers
as a percent of total sales delivered in our franchise area decreased to 0.4% in
2002  from  4.1% in  2001.  Distribution  deliveries  increased  3.7% in 2002 as
compared to 2001, which increased  revenues from electricity  throughput by $3.9
million in 2002 from the prior year. The higher distribution deliveries resulted
from additional  residential and commercial  demand due to warmer summer weather
that was offset in part by the effect of continued  sluggishness  in the economy
on demand by  industrial  customers.  Sales  revenues from  wholesale  customers
decreased by $14.3 million in 2002 compared to 2001,  due to a decline in market
prices.

          Excluding  the effects  shown in the table above,  operating  revenues
decreased by $57.0  million or 14.9% in 2001 from 2000.  The decrease  primarily
resulted from a $56.7 million reduction in wholesale  revenues (a 93.3% decrease
in wholesale kilowatt-hour sales) from the prior year due to the substitution of
PSA sales for  kilowatt-hour  sales to other wholesale  customers.  Distribution
deliveries  declined  2.3% in 2001  from  2000  reflecting  the  influence  of a
declining national economy on our regional business activity that contributed to
lower distribution deliveries to commercial and industrial customers.  Partially
offsetting  the impact of a weaker  economy was an  increase in retail  electric
generation  revenues  reflecting  a return  of  customers  previously  served by
alternative  generation  suppliers.  Retail  generation  sales  increased in all
customer categories resulting in an overall 4.8% increase in kilowatt-hour sales
in 2001 from the prior  year.  Electric  generation  services  provided by other
suppliers in our service area decreased to 4.1% in 2001 from 10.6% in 2000.


    Changes in KWH Sales                        2002             2001
    -------------------------------------------------------------------
     Increase (Decrease)
    Electric Generation:
      Retail................................     7.8%             4.8%
      Wholesale.............................    12.0%           (93.3)%
    -------------------------------------------------------------------
    Total Electric Generation Sales.........    10.3%           (62.6)%
    ===================================================================
    Distribution Deliveries:
      Residential...........................    10.2%             0.3%
      Commercial and industrial.............     0.5%            (3.6)%
    -------------------------------------------------------------------
    Total Distribution Deliveries...........     3.7%            (2.3)%
    ===================================================================



Operating Expenses and Taxes

           Total operating expenses and taxes increased by $2.3 million in 2002
and by $100.1 million in 2001 from the prior year. Excluding the effects of
restructuring, total 2001 operating expenses and taxes were $30.0 million lower
than 2000. The following table presents changes from the prior year by expense
category excluding the impact of restructuring.


   Operating Expenses and Taxes - Changes            2002         2001
   -------------------------------------------------------------------
    Increase (Decrease)                                (In millions)
   Fuel and purchased power......................   $  6.7       $(12.9)
   Nuclear operating costs.......................    (24.6)         1.9
   Other operating costs.........................      5.4          1.9
   --------------------------------------------------------------------
     Total operation and maintenance expenses....    (12.5)        (9.1)

   Provision for depreciation and amortization...     (0.3)         3.3
   General taxes.................................     10.3         (5.2)
   Income taxes..................................      4.8        (19.0)
   ---------------------------------------------------------------------
     Total operating expenses and taxes..........   $  2.3       $(30.0)
   =====================================================================


          Higher  fuel and  purchased  power costs in 2002  compared  with 2001,
resulted from a $4.2 million  increase in power  purchased from FES,  reflecting
higher kilowatt-hours  purchased due to increased  kilowatt-hour sales and lower
unit prices.  Nuclear operating costs decreased $24.6 million,  primarily due to
one less refueling outage in 2002 compared to 2001. The $5.4 million increase in
other operating costs resulted principally from higher employee benefit costs.


                                       3
<PAGE>

          The  decrease in fuel and  purchased  power costs in 2001  compared to
2000,  primarily  reflects  the transfer of fossil  operations  to FGCO with our
power  requirements  being  provided  under  the PSA.  Nuclear  operating  costs
increased slightly in 2001 from the previous year.

          In 2001, depreciation and amortization increased $3.3 million compared
with 2000 primarily from the absence in 2001 of an adjustment in 2000 related to
decommissioning costs.

          General taxes increased by $10.3 million in 2002 from 2001 as a result
of additional  property  taxes and gross receipt taxes.  In 2001,  general taxes
decreased by $5.2 million in 2001 from 2000 primarily due to a one-time  benefit
of $3 million resulting from  successfully  resolving certain pending tax issues
and the effect of a reduction to the gross receipts tax rate.

Net Interest Charges

          Net interest  charges  continued to trend  lower,  decreasing  by $2.2
million in 2002 and by $2.1  million in 2001,  compared  to the prior  year.  We
continue to redeem and refinance  outstanding debt during 2002 - net redemptions
and refinancing activities totaled $1.7 million and $14.5 million, respectively,
and will result in annualized savings of $523,000.

Capital Resources and Liquidity
-------------------------------

          Through  net debt and  preferred  stock  redemptions,  we  continue to
reduce the cost of debt and preferred stock, and improve our financial  position
in 2002. During 2002, we reduced our total debt by approximately  $40.1 million.
At the end of 2002, our common equity as a percentage of capitalization stood at
49% compared to 42% at the end of 2001.  The higher common equity  percentage in
2002  compared to 2001  resulted  from net  redemptions  of preferred  stock and
long-term debt and the increase in retained earnings.

Changes in Cash Position

          As of  December  31,  2002,  we had  $1.2  million  of cash  and  cash
equivalents,  compared  with $0.1  million as of December  31,  2001.  The major
sources for changes in these balances are summarized below.

Cash Flows From Operating Activities

          Our net cash from  operating  activities  is provided by our regulated
energy services.  Net cash provided from operating activities was $105.8 million
in 2002 and $93.3 million in 2001.  Cash  provided from 2002 and 2001  operating
activities are as follows:


  Operating Cash Flows                     2002          2001
  -------------------------------------------------------------
                                             (In millions)

  Cash earnings (1)..................     $115.8        $101.6
  Working capital and other..........      (10.0)         (8.3)
  -------------------------------------------------------------

  Total..............................     $105.8         $93.3
  =============================================================

(1) Includes net income,  depreciation and amortization,  deferred income taxes,
    investment tax credits and major noncash charges.


Cash Flows From Financing Activities

          In 2002,  the net cash used for financing  activities of $75.3 million
primarily  reflects the redemptions of debt and preferred stock shown below. The
following table provides  details  regarding new issues and  redemptions  during
2002:

  Securities Issued or Redeemed in 2002
  --------------------------------------------------------------
                                                   (In millions)
  New Issues
  ----------
       Pollution Control Notes.....................   $ 14.5

  Redemptions
  -----------
       First Mortgage Bonds........................      1.0
       Pollution Control Notes.....................     14.5
       Capital Fuel Leases.........................     40.7
       Preferred Stock.............................      0.8
       Other, principally redemption premiums......      0.6
  -----------------------------------------------------------
                                                      $ 57.6

                                       4

<PAGE>

          In 2001,  net cash flow used for  financing  activities  totaled $50.8
million,  primarily  due to $51 million of long-term  debt  redemptions  and $31
million of dividend payments.

          We had about $36.5  million of cash and temporary  investments  and no
short-term  indebtedness as of December 31, 2002. At the end of 2002, we had the
capability to issue $323 million of additional first mortgage bonds on the basis
of property additions and retired bonds. Based upon applicable  earnings in 2002
under the earnings  coverage test contained in our charter,  we could issue $251
million of preferred stock (assuming no additional debt was issued).

Cash Flows From Investing Activities

          Net cash used in investing  activities  totaled $29.3 million in 2002.
The net cash used for investing  resulted from loan payments from OE, which were
offset in part by an increase in property  additions.  Expenditures for property
additions  primarily  include   expenditures   supporting  our  distribution  of
electricity.

          In 2001, net cash used in investing  activities totaled $45.9 million,
principally due to property additions and loans to associated  companies,  which
were offset in part by sales of assets to associated companies.

          Our cash  requirements  in 2003 for operating  expenses,  construction
expenditures,  scheduled debt  maturities and preferred  stock  redemptions  are
expected  to be  met  without  increasing  our  net  debt  and  preferred  stock
outstanding.   Major  contractual  obligations  for  future  cash  payments  are
summarized in the following table:


<TABLE>
<CAPTION>

                                                   Less than           1-3             3-5           More than
Contractual Obligations               Total          1 Year           Years           Years           5 Years
---------------------------------------------------------------------------------------------------------------
                                                                  (in millions)
<S>                                   <C>              <C>             <C>             <C>               <C>
Long-term debt..................      $251             $41             $36             $ 2               $172
Preferred stock (1).............        14               1               2              11                 --
Purchases (2)...................        89              21              17              29                 22
-------------------------------------------------------------------------------------------------------------
   Total........................      $354             $63             $55             $42               $194
=============================================================================================================

<FN>


(1) Subject to mandatory redemption.
(2) Fuel and power purchases under contracts with fixed or minimum quantities and approximate timing.

</FN>
</TABLE>

          Our capital  spending for the period 2003-2007 is expected to be about
$123 million (excluding nuclear fuel) of which approximately $53 million applies
to 2003. Investments for additional nuclear fuel during the 2003-2007 period are
estimated to be approximately $42 million, of which about $19 million relates to
2003.  During the same periods,  our nuclear fuel investments are expected to be
reduced by  approximately  $34 million  and $17  million,  respectively,  as the
nuclear fuel is consumed.  We had no other  material  obligations as of December
31, 2002 that have not been recognized on our Balance Sheet.

          On February  22, 2002,  Moody's  Investor  Service  changed its credit
rating  outlook for  FirstEnergy  from stable to negative.  The change was based
upon a  decision  by the  Commonwealth  Court of  Pennsylvania  to remand to the
Pennsylvania  Public Utility Commission (PPUC) for  reconsideration its decision
on the mechanism for sharing  merger  savings and reversed the PPUC's  decisions
regarding rate relief and accounting  deferrals  rendered in connection with its
approval of the GPU merger.  On April 4, 2002,  Standard & Poor's (S&P)  changed
its outlook for  FirstEnergy's  credit  ratings  from stable to negative  citing
recent  developments  including:  damage to the Davis-Besse  reactor vessel head
(the  Company  has no  ownership  interest  in  Davis-Besse),  the  Pennsylvania
Commonwealth Court decision,  and deteriorating market conditions for some sales
of its remaining  non-core  assets.  On July 31, 2002,  Fitch revised its rating
outlook for FirstEnergy, negative from stable. The revised outlook reflected the
adverse impact of the unplanned Davis-Besse outage, Fitch's judgment about NRG's
financial ability to consummate the purchase of four power plants (none owned by
the Company) from  FirstEnergy and Fitch's  expectation of subsequent  delays in
debt  reduction.  On August 1, 2002,  S&P concluded  that while NRG's  liquidity
position  added  uncertainty to  FirstEnergy's  sale of power plants to NRG, its
ratings would not be affected.  S&P found  FirstEnergy's cash flows sufficiently
stable to support a continued  (although  delayed) program of debt and preferred
stock  redemption.  S&P noted  that  they  would  continue  to  closely  monitor
FirstEnergy's  progress  on  various  initiatives.  On  January  21,  2003,  S&P
indicated its concern about FirstEnergy's  disclosure of noncash charges related
to deferred costs in Pennsylvania,  pension and other post-retirement  benefits,
and  Emdersa  (FirstEnergy's  Argentina  operations),  which  were  higher  than
anticipated  in the third  quarter of 2002.  S&P  identified  the restart of the
Davis-Besse nuclear plant "...without significant delay beyond April 2003..." as
key to maintaining its current debt ratings. S&P also identified other issues it
would  continue  to  monitor  including:  its  deleveraging  efforts,  free cash
generated  during  2003,  the Jersey  Central  Power & Light  Company rate case,
successful  hedging  of its short  power  position,  and  continued  capture  of
projected  merger  savings.  While  FirstEnergy  anticipates  being  prepared to
restart the  Davis-Besse  plant in the spring of 2003,  the  Nuclear  Regulatory
Commission (NRC) must authorize the unit's restart following a formal inspection
process prior to its returning  the unit to service.  Significant  delays in the
planned date of  Davis-Besse's  return to service or other  factors  (identified
above)  affecting  the speed  with  which  FirstEnergy  reduces  debt  could put
additional pressure on Penn's credit ratings.

                                       5

<PAGE>


Interest Rate Risk
------------------

          Our exposure to fluctuations in market interest rates is reduced since
a  significant  portion of our debt has fixed  interest  rates,  as noted in the
following  table.  We are subject to the inherent  risks related to  refinancing
maturing debt by issuing new debt securities. Changes in the market value of our
nuclear  decommissioning trust funds had been recognized by making corresponding
changes to the decommissioning liability, as described in Note 1 - Utility Plant
and Depreciation.  In conjunction with the adoption of SFAS 143, "Accounting for
Asset Retirement  Obligations,"  on January 1, 2003, we reclassified  unrealized
gains and losses to other  comprehensive  income (OCI) in  accordance  with SFAS
115, "Accounting for Certain Investments in Debt and Equity." While fluctuations
in the fair value of our Ohio  EUOCs'  trust  balances  will  eventually  affect
earnings  (affecting OCI initially) based on the guidance  provided by SFAS 115,
our non-Ohio EUOC have the  opportunity to recover from customers the difference
between the  investments  held in trust and their  decommissioning  obligations.
Thus, in absence of disallowed  costs,  there should be no earnings  effect from
fluctuations in their  decommissioning  trust balances. As of December 31, 2002,
decommissioning trust balances totaled $1.050 billion, with $698 million held by
our Ohio EUOC and the balance  held by our non-Ohio  EUOC.  As of year end 2002,
trust  balances  included  51% of  equity  and 49% of debt  instruments.


          The table  below  presents  principal  amounts  and  related  weighted
average  interest rates by year of maturity for our investment  portfolio,  debt
obligations and preferred stock with mandatory redemption provisions.

<TABLE>
<CAPTION>


Comparison of Carrying Value to Fair Value
-------------------------------------------------------------------------------------------------------------------
                                                                                        There-                Fair
                                 2003       2004       2005       2006       2007        after     Total     Value
--------------------------------------------------------------------------------------------------------------------
                                                                (Dollars in millions)
<S>                               <C>        <C>       <C>        <C>         <C>        <C>        <C>       <C>
Assets
--------------------------------------------------------------------------------------------------------------------
Investments other than Cash
   and Cash Equivalents:
Fixed Income.................                          $ 6        $ 1         $ 1        $115       $123      $127
   Average interest rate.....                           7.8%       7.8%        7.8%       5.5%       5.7%
--------------------------------------------------------------------------------------------------------------------
Liabilities
--------------------------------------------------------------------------------------------------------------------
Long-term Debt:
Fixed rate...................     $41        $ 35      $ 1        $ 1         $ 1        $110       $189      $198
   Average interest rate ....      7.6%       6.6%      9.7%       9.7%        9.7%       7.0%       7.1%
Variable rate................                                                            $ 62       $ 62      $ 62
   Average interest rate.....                                                             2.4%       2.4%
Preferred Stock..............     $  1       $  1      $ 1        $ 1         $10                   $ 14      $ 14
   Average dividend rate ....      7.6%        7.6%     7.6%       7.6%        7.6%                  7.6%
-------------------------------------------------------------------------------------------------------------------

</TABLE>


Equity Price Risk
-----------------

          Included  in  our  nuclear   decommissioning   trust  investments  are
marketable equity securities  carried at their market value of approximately $38
million  and $47  million as of  December  31,  2002 and 2001,  respectively.  A
hypothetical  10% decrease in prices quoted by stock exchanges would result in a
$4  million  reduction  in fair  value as of  December  31,  2002  (see Note 1 -
Supplemental Cash Flows Information).

Outlook
-------

          In 2002, a number of our customers previously electing to be served by
alternative  energy providers  returned to our system for their energy needs. We
have a  continuing  responsibility  to  provide  power  to those  customers  not
choosing to receive power from an alternative energy supplier subject to certain
limits.  Adopting new  approaches to regulation  and  experiencing  new forms of
competition  have  created new  uncertainties.  We continue to deliver  power to
homes and businesses  through our existing  distribution  system,  which remains
regulated.

          As part of our transition plan we are obligated to supply  electricity
to customers who do not choose an alternative  supplier.  Our competitive retail
sales affiliate, FES, acts as an alternate supplier for a portion of the load in
our  franchise  area.  In 2003,  the total peak load  forecasted  for  customers
electing  to stay with us,  including  the load served by our  affiliate  is 955
megawatts (MW).

                                       6

<PAGE>


Environmental Matters

          We believe we are in compliance  with the current sulfur dioxide (SO2)
and  nitrogen  oxide  (NOx)  reduction  requirements  under  the  Clean  Air Act
Amendments of 1990. In 1998, the Environmental Protection Agency (EPA) finalized
regulations  requiring additional NOx reductions in the future from our Ohio and
Pennsylvania  facilities.  Various  regulatory  and judicial  actions have since
sought to further define NOx reduction  requirements (see Note 5 - Environmental
Matters).  We continue to evaluate  our  compliance  plans and other  compliance
options.

          Violations  of  federally  approved  SO2  regulations  can  result  in
shutdown of the generating unit involved  and/or civil or criminal  penalties of
up to  $31,500  for  each  day a unit is in  violation.  The EPA has an  interim
enforcement  policy for SO2 regulations in Ohio that allows for compliance based
on a 30-day averaging  period. We cannot predict what action the EPA may take in
the future with respect to the interim enforcement policy.

          In 1999 and 2000,  the EPA  issued  Notices  of  Violation  (NOV) or a
Compliance Order to nine utilities covering 44 power plants,  including the W.H.
Sammis  Plant.  In addition,  the U.S.  Department  of Justice filed eight civil
complaints against various investor-owned utilities,  which included a complaint
against OE and Penn in the U.S.  District  Court for the  Southern  District  of
Ohio, for which hearings began on February 3, 2003. The NOV and complaint allege
violations of the Clean Air Act (CAA).  The civil complaint  against OE and Penn
requests  installation of "best available  control  technology" as well as civil
penalties  of up to $27,500 per day.  Although  unable to predict the outcome of
these  proceedings,  we believe the Sammis Plant is in full  compliance with the
CAA and that the NOV and complaint are without merit. Penalties could be imposed
if the  Sammis  Plant  continues  to  operate  without  correcting  the  alleged
violations and a court  determines that the  allegations  are valid.  The Sammis
Plant continues to operate while these proceedings are pending.

          In  December  2000,  the EPA  announced  it  would  proceed  with  the
development of  regulations  regarding  hazardous air  pollutants  from electric
power  plants.  The EPA  identified  mercury as the  hazardous  air pollutant of
greatest  concern.  The EPA  established  a schedule to propose  regulations  by
December 2003 and issue final  regulations  by December 2004. The future cost of
compliance with these regulations may be substantial.

          As a result of the Resource  Conservation and Recovery Act of 1976, as
amended,  and the  Toxic  Substances  Control  Act of 1976,  federal  and  state
hazardous  waste   regulations  have  been  promulgated.   Certain   fossil-fuel
combustion waste products,  such as coal ash, were exempted from hazardous waste
disposal  requirements  pending  the  EPA's  evaluation  of the need for  future
regulation.   The  EPA  has  issued  its  final  regulatory  determination  that
regulation of coal ash as a hazardous waste is  unnecessary.  In April 2000, the
EPA announced that it will develop  national  standards  regulating  disposal of
coal ash under its authority to regulate nonhazardous waste.

          The effects of compliance on the Company with regard to  environmental
matters  could have a material  adverse  effect on our earnings and  competitive
position.  These  environmental  regulations affect our earnings and competitive
position to the extent we compete  with  companies  that are not subject to such
regulations  and  therefore  do not  bear  the  risk of  costs  associated  with
compliance,  or failure to comply,  with such regulations.  We believe we are in
material compliance with existing regulations, but are unable to predict how and
when  applicable  environmental  regulations  may change and what,  if any,  the
effects of any such change would be.

Significant Accounting Policies
-------------------------------

          We prepare our  financial  statements in  accordance  with  accounting
principles  that are generally  accepted in the United  States.  Application  of
these  principles  often  requires  a high  degree of  judgment,  estimates  and
assumptions that affect our financial results.  All of our assets are subject to
their own  specific  risks and  uncertainties  and are  regularly  reviewed  for
impairment.  Assets related to the  application of the policies  discussed below
are  similarly  reviewed  with their risks and  uncertainties  reflecting  those
specific factors. Our more significant accounting policies are described below.

Regulatory Accounting

          We are  subject  to  regulation  that sets the  prices  (rates) we are
permitted  to  charge  our  customers  based on our  costs  that the  regulatory
agencies determine we are permitted to recover. At times,  regulators permit the
future  recovery  through  rates of costs  that  would be  currently  charged to
expense by an  unregulated  company.  This  rate-making  process  results in the
recording of regulatory  assets based on anticipated  future cash inflows.  As a
result of the changing  regulatory  framework  in  Pennsylvania,  a  significant
amount of  regulatory  assets have been  recorded -- $157 million as of December
31,  2002.  We  continually   review  these  assets  to  assess  their  ultimate
recoverability  within  the  approved  regulatory  guidelines.  Impairment  risk
associated  with  these  assets  relates  to  potentially  adverse  legislative,
judicial or regulatory actions in the future.

                                       7
<PAGE>


Revenue Recognition

          We follow the accrual method of accounting  for revenues,  recognizing
revenue  for  kilowatt-hours  that have been  delivered  but not yet been billed
through the end of the year. The  determination  of unbilled  revenues  requires
management to make various estimates including:

        o  Net energy generated or purchased for retail load
        o  Losses of energy over distribution lines
        o  Allocations to distribution companies within the FirstEnergy system
        o  Mix of kilowatt-hour usage by residential, commercial and industrial
           customers
        o  Kilowatt-hour usage of customers receiving electricity from
           alternative suppliers

Pension and Other Postretirement Benefits Accounting

          Our  reported  costs of  providing  non-contributory  defined  pension
benefits and  postemployment  benefits other than pensions  (OPEB) are dependent
upon  numerous  factors  resulting  from  actual  plan  experience  and  certain
assumptions.

          Pension  and  OPEB  costs  are   affected  by  employee   demographics
(including  age,  compensation  levels,  and employment  periods),  the level of
contributions  we make to the plans,  and earnings on plan  assets.  Pension and
OPEB  costs  may also be  affected  by  changes  to key  assumptions,  including
anticipated  rates of return on plan assets,  the discount rates and health care
trend rates used in determining  the projected  benefit  obligations and pension
and OPEB costs.

          In accordance with SFAS 87,  "Employers'  Accounting for Pensions" and
SFAS  106,  "Employers'  Accounting  for  Postretirement   Benefits  Other  Than
Pensions," changes in pension and OPEB obligations associated with these factors
may  not be  immediately  recognized  as  costs  on the  income  statement,  but
generally  are  recognized in future years over the  remaining  average  service
period of plan  participants.  SFAS 87 and SFAS 106 delay recognition of changes
due to the  long-term  nature of pension  and OPEB  obligations  and the varying
market  conditions  likely  to  occur  over  long  periods  of  time.  As  such,
significant  portions of pension  and OPEB costs  recorded in any period may not
reflect the actual level of cash benefits  provided to plan participants and are
significantly  influenced by assumptions about future market conditions and plan
participants' experience.

          In selecting an assumed discount rate, we consider currently available
rates  of  return  on  high-quality  fixed  income  investments  expected  to be
available during the period to maturity of the pension and other  postretirement
benefit obligations. Due to the significant decline in corporate bond yields and
interest rates in general  during 2002, we reduced the assumed  discount rate as
of December 31, 2002 to 6.75% from 7.25% used in 2001 and 7.75% used in 2000.

          Our assumed rate of return on pension plan assets considers historical
market returns and economic  forecasts for the types of investments  held by our
pension  trusts.  The market values of our pension  assets have been affected by
sharp declines in the equity  markets since  mid-2000.  In 2002,  2001 and 2000,
plan assets have earned (11.3)%,  (5.5)% and (0.3)%,  respectively.  Our pension
costs in 2002 were computed  assuming a 10.25% rate of return on plan assets. As
of  December  31,  2002 the  assumed  return on plan assets was reduced to 9.00%
based  upon our  projection  of future  returns  and  pension  trust  investment
allocation of approximately  60% large cap equities,  10% small cap equities and
30% bonds.

          Based on pension  assumptions  and pension  plan assets as of December
31, 2002, we will not be required to fund our pension plans in 2003.  While OPEB
plan assets have also been affected by sharp declines in the equity market,  the
impact  is not as  significant  due to the  relative  size of the  plan  assets.
However,  health care cost trends have  significantly  increased and will affect
future OPEB costs.  The 2003  composite  health  care trend rate  assumption  is
approximately 10%-12% gradually decreasing to 5% in later years, compared to our
2002 assumption of approximately 10% in 2002,  gradually  decreasing to 4%-6% in
later years. In determining our trend rate assumptions, we included the specific
provisions of our health care plans, the  demographics and utilization  rates of
plan participants,  actual cost increases  experienced in our health care plans,
and projections of future medical trend rates.

                                       8

<PAGE>


          The effect on our SFAS 87 and 106 costs and  liabilities  from changes
in key assumptions are as follows:


Increase in Costs from Adverse Changes in Key Assumptions
-------------------------------------------------------------------------------
Assumption                       Adverse Change      Pension   OPEB    Total
-------------------------------------------------------------------------------
                                                  (In millions)
Discount rate                    Decrease by 0.25%     $0.1    $0.1    $0.2
Long-term return on assets       Decrease by 0.25%      0.1      --     0.1
Health care trend rate           Increase by 1%        na       0.2     0.2

Increase in Minimum Pension Liability
-------------------------------------
Discount rate                    Decrease by 0.25%      2.0     na      2.0
-------------------------------------------------------------------------------


          As a result of the reduced market value of our pension plan assets, we
were required to recognize an additional minimum liability as prescribed by SFAS
87 and SFAS 132, "Employers' Disclosures about Pension and Postretirement
Benefits," as of December 31, 2002. We eliminated our prepaid pension asset of
$8.8 million and established a minimum liability of $11.7 million, recording an
intangible asset of $3.6 million and reducing OCI by $9.9 million (recording a
related deferred tax benefit of $7.0 million). The charge to OCI will reverse in
future periods to the extent the fair value of trust assets exceed the
accumulated benefit obligation. The amount of pension liability recorded as of
December 31, 2002 increased due to the lower discount rate assumed and reduced
market value of plan assets as of December 31, 2002. Our non-cash, pre-tax
pension and OPEB expense under SFAS 87 and SFAS 106 is expected to increase by
$1.1 million and $0.4 million, respectively - a total of $1.5 million in 2003 as
compared to 2002.

Long-Lived Assets

          In accordance  with SFAS No. 144,  "Accounting  for the  Impairment or
Disposal of Long-Lived  Assets," we periodically  evaluate our long-lived assets
to determine  whether  conditions  exist that would  indicate  that the carrying
value of an asset may not be fully recoverable. The accounting standard requires
that if the sum of future cash flows  (undiscounted)  expected to result from an
asset, is less than the carrying value of the asset, an asset impairment must be
recognized in the financial statements. If impairment, other than of a temporary
nature, has occurred, we recognize a loss - calculated as the difference between
the carrying value and the estimated fair value of the asset (discounted  future
net cash flows).

Recently Issued Accounting Standards Not Yet Implemented
--------------------------------------------------------

       SFAS 143, "Accounting for Asset Retirement Obligations"

          In June 2001,  the FASB issued SFAS 143.  The new  statement  provides
accounting  standards  for  retirement   obligations  associated  with  tangible
long-lived assets,  with adoption required by January 1, 2003. SFAS 143 requires
that the fair  value  of a  liability  for an  asset  retirement  obligation  be
recorded in the period in which it is incurred.  The associated asset retirement
costs are  capitalized as part of the carrying  amount of the long-lived  asset.
Over time the  capitalized  costs are  depreciated  and the present value of the
asset retirement  liability increases,  resulting in a period expense.  However,
rate-regulated  entities may recognize  regulatory  assets or liabilities if the
criteria for such  treatment are met. Upon  retirement,  a gain or loss would be
recorded  if the cost to  settle  the  retirement  obligation  differs  from the
carrying amount.

          We have identified  applicable legal  obligations as defined under the
new standard, principally for nuclear power plant decommissioning. Upon adoption
of SFAS 143 in January 2003, asset retirement costs of $78 million were recorded
as part of the  carrying  amount  of the  related  long-lived  asset,  offset by
accumulated  depreciation of $9 million.  Due to the increased  carrying amount,
the related long-lived assets were tested for impairment in accordance with SFAS
144. No impairment was indicated.  The asset retirement liability at the date of
adoption  was  $121  million.  As  of  December  31,  2002,  Penn  had  recorded
decommissioning  liabilities  of  $120  million.  The  change  in the  estimated
liabilities  resulted  from  changes in  methodology  and  various  assumptions,
including changes in the projected dates for decommissioning.

          Management  expects  that  substantially  all nuclear  decommissioning
costs for Penn will be recoverable  through its regulated rates.  Therefore,  we
recognized a regulatory  liability of $69 million upon  adoption of SFAS 143 for
the transition amounts related to establishing the asset retirement  obligations
for nuclear  decommissioning.  The  remaining  cumulative  effect  adjustment to
recognize  the  undepreciated  asset  retirement  cost and the asset  retirement
liability  offset by the  reversal of the  previously  recorded  decommissioning
liabilities for Penn was a $1.1 million  decrease to income ($0.6 million net of
tax).

                                       9

<PAGE>


     SFAS  146,   "Accounting  for  Costs   Associated  with  Exit  or  Disposal
     Activities"

          This  statement,  which was issued by the FASB in July 2002,  requires
the recognition of costs associated with exit or disposal activities at the time
they are  incurred  rather  than when  management  commits  to a plan of exit or
disposal.  It also  requires the use of fair value for the  measurement  of such
liabilities.  The new standard  supersedes  guidance  provided by EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs  to  Exit  an   Activity   (including   Certain   Costs   Incurred   in  a
Restructuring)."   This  new  standard  was  effective  for  exit  and  disposal
activities initiated after December 31, 2002. Since it is applied prospectively,
there will be no impact upon adoption. However, SFAS 146 could change the timing
and amount of costs  recognized  in  connection  with  future  exit or  disposal
activities.

     FASB Interpretation  (FIN) No. 45,  "Guarantor's  Accounting and Disclosure
     Requirements for Guarantees,  Including Indirect Guarantees of Indebtedness
     of Others - an  interpretation  of FASB  Statements  No. 5, 57, and 107 and
     rescission of FASB Interpretation No. 34"

          The FASB issued FIN 45 in January 2003. This interpretation identifies
minimum guarantee  disclosures required for annual periods ending after December
15, 2002. It also clarifies  that  providers of guarantees  must record the fair
value of those  guarantees  at their  inception.  This  accounting  guidance  is
applicable  on a  prospective  basis to  guarantees  issued  or  modified  after
December  31,  2002.  We do not believe  that  implementation  of FIN 45 will be
material but we will continue to evaluate anticipated guarantees.

                                       10

<PAGE>

<TABLE>
<CAPTION>

                                             PENNSYLVANIA POWER COMPANY

                                                STATEMENTS OF INCOME


For the Years Ended December 31,                                                 2002         2001          2000
-------------------------------------------------------------------------------------------------------------------
                                                                                         (In thousands)

<S>                      <C>                                                    <C>          <C>           <C>
OPERATING REVENUES (Note 1)...............................................      $506,407     $498,401      $383,112
                                                                                --------     --------      --------

OPERATING EXPENSES AND TAXES:
   Fuel and purchased power (Note 1)......................................       181,968      175,257        68,099
   Nuclear operating costs (Note 1).......................................        90,024      114,623       112,731
   Other operating costs (Note 1).........................................        50,523       45,133        59,389
                                                                                --------     --------      --------
     Total operation and maintenance expenses.............................       322,515      335,013       240,219
   Provision for depreciation and amortization............................        56,763       57,087        55,964
   General taxes..........................................................        24,474       14,214        22,076
   Income taxes...........................................................        41,733       36,909        24,874
                                                                                --------     --------      --------
     Total operating expenses and taxes...................................       445,485      443,223       343,133
                                                                                --------     --------      --------

OPERATING INCOME..........................................................        60,922       55,178        39,979

OTHER INCOME (Note 1).....................................................         1,960        3,185         2,300
                                                                                --------     --------      --------

INCOME BEFORE NET INTEREST CHARGES........................................        62,882       58,363        42,279
                                                                                --------     --------      --------

NET INTEREST CHARGES:
   Interest on long-term debt.............................................        15,521       16,971        18,651
   Interest on nuclear fuel obligations...................................             8          141           364
   Allowance for borrowed funds used during construction..................        (1,509)        (850)       (1,005)
   Other interest expense.................................................         1,145        1,060         1,422
                                                                                --------     --------      --------
     Net interest charges.................................................        15,165       17,322        19,432
                                                                                --------     --------      --------

NET INCOME................................................................        47,717       41,041        22,847

PREFERRED STOCK DIVIDEND REQUIREMENTS.....................................         3,699        3,703         3,704
                                                                                --------     --------      --------

EARNINGS ON COMMON STOCK..................................................      $ 44,018     $ 37,338      $ 19,143
                                                                                ========     ========      ========

<FN>


The accompanying Notes to Financial Statements are an integral part of these statements.

</FN>
</TABLE>

                                                         11


<PAGE>

<TABLE>
<CAPTION>

                                             PENNSYLVANIA POWER COMPANY

                                                   BALANCE SHEETS

As of December 31,                                                                        2002             2001
------------------------------------------------------------------------------------------------------------------
                                                                                              (In thousands)
                                    ASSETS
UTILITY PLANT:
<S>                                                                                      <C>              <C>
In service........................................................................       $680,729         $664,432
Less-Accumulated provision for depreciation.......................................        316,424          290,216
                                                                                         --------         --------
                                                                                          364,305          374,216
                                                                                         --------         --------
Construction work in progress-
   Electric plant.................................................................         44,696           24,141
   Nuclear fuel...................................................................          8,812            2,921
                                                                                         --------         --------
                                                                                           53,508           27,062
                                                                                         --------         --------
                                                                                          417,813          401,278
                                                                                         --------         --------

OTHER PROPERTY AND INVESTMENTS:
Nuclear plant decommissioning trusts (Note 1).....................................        119,401          116,634
Long-term notes receivable from associated companies..............................         38,921           39,290
Other (Note 1H)...................................................................          2,569           21,597
                                                                                         --------         --------
                                                                                          160,891          177,521
                                                                                         --------         --------

CURRENT ASSETS:
Cash and cash equivalents.........................................................          1,222               67
Notes receivable from associated companies........................................         35,317           54,411
Receivables-
   Customers (less accumulated provisions of $702,000 and $619,000,
     respectively, for uncollectible accounts)....................................         44,341           40,890
   Associated companies...........................................................         42,652           36,491
   Other..........................................................................          5,262            4,787
Materials and supplies, at average cost...........................................         30,309           25,598
Prepayments.......................................................................          5,346            5,682
                                                                                         --------         --------
                                                                                          164,449          167,926
                                                                                         --------         --------

DEFERRED CHARGES:
Regulatory assets.................................................................        156,903          208,838
Other.............................................................................          7,692            4,534
                                                                                         --------         --------
                                                                                          164,595          213,372
                                                                                         --------         --------
                                                                                         $907,748         $960,097
                                                                                         ========         ========

                        CAPITALIZATION AND LIABILITIES

CAPITALIZATION (See Statements of Capitalization):
Common stockholder's equity.......................................................       $229,374         $223,788
Preferred stock-
   Not subject to mandatory redemption............................................         39,105           39,105
   Subject to mandatory redemption................................................         13,500           14,250
Long-term debt-
   Associated companies...........................................................             --           21,064
   Other..........................................................................        185,499          240,983
                                                                                         --------         --------
                                                                                          467,478          539,190
                                                                                         --------         --------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock-
   Associated companies...........................................................             --           18,090
   Other..........................................................................         66,556           12,075
Accounts payable-
   Associated companies...........................................................         52,653           50,604
   Other..........................................................................          5,730            1,441
Accrued taxes.....................................................................         12,507           18,853
Accrued interest..................................................................          5,558            5,264
Other.............................................................................         10,479            9,675
                                                                                         --------         --------
                                                                                          153,483          116,002
                                                                                         --------         --------

DEFERRED CREDITS:
Accumulated deferred income taxes.................................................        117,385          136,808
Accumulated deferred investment tax credits.......................................          3,810            4,108
Nuclear plant decommissioning costs...............................................        119,863          117,096
Other.............................................................................         45,729           46,893
                                                                                         --------         --------
                                                                                          286,787          304,905
                                                                                         --------         --------

COMMITMENTS AND CONTINGENCIES (Notes 2 and 5).....................................
                                                                                         --------         --------
                                                                                         $907,748         $960,097
                                                                                         ========         ========

<FN>

The accompanying Notes to Financial Statements are an integral part of these balance sheets.

</FN>
</TABLE>

                                                         12

<PAGE>

<TABLE>

                                             PENNSYLVANIA POWER COMPANY

                                            STATEMENTS OF CAPITALIZATION

<CAPTION>
As of December 31,                                                                             2002       2001
------------------------------------------------------------------------------------------------------------------
                (Dollars in thousands, except per share amounts)
COMMON STOCKHOLDER'S EQUITY:
<S>                                                                                          <C>        <C>
   Common stock, $30 par value, 6,500,000 shares authorized, 6,290,000 shares outstanding    $188,700   $188,700
   Other paid-in capital................................................................         (310)      (310)
   Accumulated other comprehensive loss (Note 3F).......................................       (9,932)        --
   Retained earnings (Note 3A)..........................................................       50,916     35,398
                                                                                             --------   --------
     Total common stockholder's equity..................................................      229,374    223,788
                                                                                             --------   --------
<CAPTION>

                                               Number of Shares            Optional
                                                  Outstanding          Redemption Price
                                               ----------------      -------------------
                                               2002        2001      Per Share  Aggregate
                                               ----        ----      ---------  ---------
PREFERRED STOCK (Note 3C):
Cumulative, $100 par value-
Authorized 1,200,000 shares
   Not Subject to Mandatory Redemption:
<S>  <C>                                      <C>         <C>        <C>        <C>          <C>        <C>
     4.24%................................    40,000      40,000     $103.13    $  4,125        4,000      4,000
     4.25%................................    41,049      41,049      105.00       4,310        4,105      4,105
     4.64%................................    60,000      60,000      102.98       6,179        6,000      6,000
     7.75%................................   250,000     250,000          --          --       25,000     25,000
                                             -------     -------                 -------      -------   --------
       Total not subject to mandatory
         redemption.......................   391,049     391,049                 $14,614       39,105     39,105
                                             =======     =======                 =======      -------   --------

   Subject to Mandatory Redemption (Note 3D):
     7.625%...............................   142,500     150,000      103.81     $14,793       14,250     15,000
   Redemption Within One Year.............                                                       (750)      (750)
                                             -------     -------                 -------      -------   --------
       Total subject to mandatory
         redemption                          142,500     150,000                 $14,793       13,500     14,250
                                             =======     =======                 =======      -------   --------

<CAPTION>
LONG-TERM DEBT (Note 3E):
   First mortgage bonds-
<S>                                                                                          <C>        <C>
     9.740% due 2003-2019...............................................................       16,591     17,565
     7.500% due 2003....................................................................       40,000     40,000
     6.375% due 2004....................................................................       20,500     20,500
     6.625% due 2004....................................................................       14,000     14,000
     8.500% due 2022....................................................................       27,250     27,250
     7.625% due 2023....................................................................        6,500      6,500
                                                                                             --------   --------
       Total first mortgage bonds.......................................................      124,841    125,815
                                                                                             --------   --------

   Secured notes-
     5.400% due 2013....................................................................        1,000      1,000
     5.400% due 2017....................................................................       10,600     10,600
    *1.350% due 2017....................................................................       17,925     17,925
     5.900% due 2018....................................................................       16,800     16,800
    *1.350% due 2021....................................................................       14,482     14,482
     6.150% due 2023....................................................................       12,700     12,700
    *1.600% due 2027....................................................................       10,300     10,300
     6.450% due 2027....................................................................           --     14,500
     5.375% due 2028....................................................................        1,734      1,734
     5.450% due 2028....................................................................        6,950      6,950
     6.000% due 2028....................................................................       14,250     14,250
     5.950% due 2029....................................................................          238        238
                                                                                             --------   ---------
       Total secured notes..............................................................      106,979    121,479
                                                                                             --------   --------

   Unsecured notes-
    *5.900% due 2033....................................................................        5,200      5,200
    *3.850% due 2029....................................................................       14,500         --
                                                                                             --------   --------
       Total unsecured notes............................................................       19,700      5,200
                                                                                             --------   --------

   Other obligations-
     Nuclear fuel.......................................................................           --     39,154
     Capital leases (Note 2)............................................................           32         95
                                                                                             --------   --------
       Total other obligations..........................................................           32     39,249
                                                                                             --------   --------
   Net unamortized discount on debt.....................................................         (247)      (281)
                                                                                             --------   --------
   Long-term debt due within one year...................................................      (65,806)   (29,415)
                                                                                             --------   --------
       Total long-term debt.............................................................      185,499    262,047
                                                                                             --------   --------
TOTAL CAPITALIZATION....................................................................     $467,478   $539,190
                                                                                             ========   ========
<FN>

* Denotes variable rate issue with December 31, 2002 interest rate shown.

The accompanying Notes to Financial Statements are an integral part of these statements.

</FN>

</TABLE>

                                                         13

<PAGE>

<TABLE>

                                             PENNSYLVANIA POWER COMPANY

                                     STATEMENTS OF COMMON STOCKHOLDER'S EQUITY

<CAPTION>
                                                                                          Accumulated
                                                                                Other        Other
                                         Comprehensive     Number      Par     Paid-In    Comprehensive     Retained
                                            Income        of Shares   Value    Capital    Income (Loss)     Earnings
                                         -------------    ---------   -------   -------   -------------     --------
                                                                 (Dollars in thousands)

<S>                                         <C>         <C>         <C>        <C>     <C>                 <C>
Balance, January 1, 2000.............                    6,290,000   $188,700   $(310)       $    --        $ 11,218
   Net income........................       $22,847                                                           22,847
                                            =======
   Cash dividends on common stock....                                                                         (4,900)
   Cash dividends on preferred stock.                                                                         (3,704)
--------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000...........                    6,290,000    188,700    (310)            --          25,461
   Net income........................       $41,041                                                           41,041
                                            =======
   Cash dividends on common stock....                                                                        (27,400)
   Cash dividends on preferred stock.                                                                         (3,704)
--------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001...........                    6,290,000    188,700    (310)            --          35,398
   Net income........................      $ 47,717                                                           47,717
   Minimum liability for unfunded retirement
     benefits, net of $(7,045,000) of
     income taxes....................        (9,932)                                          (9,932)
                                           --------
   Comprehensive income..............      $ 37,785
                                           ========
   Cash dividends on preferred stock.                                                                         (3,699)
   Cash dividends on common stock....                                                                        (28,500)
--------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002...........                    6,290,000   $188,700   $(310)       $(9,932)       $ 50,916
====================================================================================================================




                                           STATEMENTS OF PREFERRED STOCK

<CAPTION>
                                                        Not Subject to                Subject to
                                                    Mandatory Redemption         Mandatory Redemption
                                                    --------------------         --------------------
                                                     Number         Par           Number         Par
                                                    of Shares      Value         of Shares      Value
                                                                 (Dollars in thousands)

             <S>                                     <C>           <C>           <C>            <C>
             Balance, January 1, 2000..........      391,049       $39,105       150,000        $15,000
             ---------------------------------------------------------------------------------------------
             Balance, December 31, 2000........      391,049        39,105       150,000         15,000
             ---------------------------------------------------------------------------------------------
             Balance, December 31, 2001........      391,049        39,105       150,000         15,000
              Redemptions-
                7.625% Series..................                                   (7,500)          (750)
             ---------------------------------------------------------------------------------------------
             Balance, December 31, 2002........      391,049       $39,105       142,500        $14,250
             =============================================================================================


<FN>
The accompanying Notes to Financial Statements are an integral part of these statements.
</FN>

</TABLE>

                                                         14
<PAGE>
<TABLE>

                                             PENNSYLVANIA POWER COMPANY

                                              STATEMENTS OF CASH FLOWS

<CAPTION>
For the Years Ended December 31,                                             2002            2001           2000
-------------------------------------------------------------------------------------------------------------------
                                                                                       (In thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                      <C>             <C>             <C>
Net income............................................................   $   47,717      $  41,041       $  22,847
Adjustments to reconcile net income to net cash from operating activities:
   Provision for depreciation and amortization........................       56,763         57,087          55,964
   Nuclear fuel and lease amortization................................       19,204         17,323          18,248
   Deferred income taxes, net.........................................       (5,337)       (11,055)         (8,620)
   Investment tax credits, net........................................       (2,595)        (2,775)         (3,051)
   Receivables........................................................       (8,434)         8,345          (8,484)
   Materials and supplies.............................................       (4,711)         3,997           2,888
   Accounts payable...................................................        6,338        (11,413)          8,335
   Other .............................................................       (3,183)        (9,265)         (9,651)
                                                                         ----------      ---------       ---------
     Net cash provided from operating activities......................      105,762         93,285          78,476
                                                                         ----------      ---------       ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
   Long-term debt.....................................................       14,500         31,626              --
Redemptions and Repayments-
   Preferred stock....................................................         (750)            --              --
   Long-term debt.....................................................      (56,837)       (51,351)        (47,796)
Dividend Payments-
   Common stock.......................................................      (28,500)       (27,400)         (4,900)
   Preferred stock....................................................       (3,699)        (3,704)         (3,704)
                                                                         ----------      ---------       ---------
     Net cash provided from (used for) financing activities...........      (75,286)       (50,829)        (56,400)
                                                                         ----------      ---------       ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions....................................................      (46,060)       (40,529)        (29,856)
Loans to associated companies.........................................           --        (19,175)        (59,421)
Loan payment from parent..............................................       19,120             --              --
Sale of assets to associated companies................................           --          6,053          67,472
Other ................................................................       (2,381)         7,787          (2,466)
                                                                         ----------      ---------       ---------
     Net cash provided from (used for) investing activities...........      (29,321)       (45,864)        (24,271)
                                                                         ----------      ---------       ---------
Net increase (decrease) in cash and cash equivalents..................        1,155         (3,408)         (2,195)
Cash and cash equivalents at beginning of year........................           67          3,475           5,670
                                                                         ----------      ---------       ---------
Cash and cash equivalents at end of year..............................   $    1,222      $      67       $   3,475
                                                                         ==========      =========       =========

SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid during the year-
   Interest (net of amounts capitalized)..............................   $   13,771      $  19,286       $  18,804
                                                                         ==========      =========       =========
   Income taxes.......................................................   $   60,078      $  53,527       $  39,704
                                                                         ==========      =========       =========


<FN>

The accompanying Notes to Financial Statements are an integral part of these statements.
</FN>


                                                        15

</TABLE>

<PAGE>
<TABLE>


                                             PENNSYLVANIA POWER COMPANY

                                                STATEMENTS OF TAXES


<CAPTION>
For the Years Ended December 31,                                             2002            2001           2000
-------------------------------------------------------------------------------------------------------------------
                                                                                       (In thousands)

GENERAL TAXES:
<S>                                                                       <C>            <C>             <C>
State gross receipts*................................................     $  18,516      $  12,776       $  14,264
Real and personal property...........................................         3,729             59           4,012
State capital stock..................................................         1,357          1,081           1,598
Social security and unemployment.....................................           750            201           2,137
Other................................................................           122             97              65
                                                                          ---------      ---------       ---------
     Total general taxes.............................................     $  24,474      $  14,214       $  22,076
                                                                          =========      =========       =========

PROVISION FOR INCOME TAXES:
Currently payable-
   Federal...........................................................     $  38,972      $  40,948       $  26,712
   State.............................................................        12,004         12,803          11,080
                                                                          ---------      ---------      ----------
                                                                             50,976         53,751          37,792
                                                                          ---------      ---------      ----------
Deferred, net-
   Federal...........................................................        (4,144)        (8,304)         (4,273)
   State.............................................................        (1,193)        (2,751)         (4,347)
                                                                          ---------      ---------       ---------
                                                                             (5,337)       (11,055)         (8,620)
                                                                          ---------      ---------       ---------
Investment tax credit amortization...................................        (2,595)        (2,775)         (3,051)
                                                                          ---------      ---------       ---------
     Total provision for income taxes................................     $  43,044      $  39,921       $  26,121
                                                                          =========      =========       =========

INCOME STATEMENT CLASSIFICATION OF PROVISION FOR
INCOME TAXES:
Operating expenses...................................................     $  41,733      $  36,909       $  24,874
Other income.........................................................         1,311          3,012           1,247
                                                                          ---------      ---------       ---------
     Total provision for income taxes................................     $  43,044      $  39,921       $  26,121
                                                                          =========      =========       =========

RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT
STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES:
Book income before provision for income taxes........................     $  90,761      $  80,962       $  48,968
                                                                          =========      =========       =========
Federal income tax expense at statutory rate.........................     $  31,766      $  28,337       $  17,139
Increases (reductions) in taxes resulting from:
   State income taxes, net of federal income tax benefit.............         7,027          6,534           4,376
   Amortization of investment tax credits............................        (2,595)        (2,775)         (3,051)
   Amortization of tax regulatory assets.............................         5,967          6,315           6,899
   Other, net........................................................           879          1,510             758
                                                                          ---------      ---------       ---------
     Total provision for income taxes................................     $  43,044      $  39,921       $  26,121
                                                                          =========      =========       =========

ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31:
Competitive transition charge........................................     $  56,172      $  75,686       $  95,497
Property basis differences...........................................        72,488         65,534          64,348
Allowance for equity funds used during construction..................         1,045          2,608           4,163
Customer receivables for future income taxes.........................         4,249          5,640           7,016
Unamortized investment tax credits...................................        (1,578)        (1,702)         (1,823)
Deferred gain for asset sale to affiliated company...................         8,810          9,943           8,925
Other comprehensive income...........................................        (7,045)            --              --
Other ...............................................................       (16,756)       (20,901)        (17,494)
                                                                          ---------      ---------       ---------
     Net deferred income tax liability...............................     $ 117,385      $ 136,808       $ 160,632
                                                                          =========      =========       =========

<FN>

* Collected from customers through regulated rates and included in revenue on the Statements of Income.

The accompanying Notes to Financial Statements are an integral part of these statements.
</FN>
                                                        16
</TABLE>

<PAGE>


NOTES TO FINANCIAL STATEMENTS

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

          Pennsylvania  Power Company  (Company),  a wholly owned  subsidiary of
Ohio  Edison  Company  (OE),  follows  the  accounting  policies  and  practices
prescribed by the Securities and Exchange  Commission  (SEC),  the  Pennsylvania
Public Utility  Commission (PPUC) and the Federal Energy  Regulatory  Commission
(FERC).  The  preparation of financial  statements in conformity with accounting
principles generally accepted in the United States (GAAP) requires management to
make periodic  estimates  and  assumptions  that affect the reported  amounts of
assets,  liabilities,  revenues and expenses and the  disclosure  of  contingent
assets and liabilities. Actual results could differ from these estimates.

     (A)   REVENUES-

          The  Company's  principal  business is providing  electric  service to
customers in western Pennsylvania. The Company's retail customers are metered on
a cycle basis.  Revenue is recognized for unbilled  electric service through the
end of the year.

          Receivables  from customers  include sales to residential,  commercial
and  industrial  customers  located in the  Company's  service area and sales to
wholesale  customers.  There was no material  concentration  of  receivables  at
December  31,  2002 or 2001,  with  respect  to any  particular  segment  of the
Company's customers.

     (B)   REGULATORY PLAN-

          Pennsylvania enacted its electric utility competition law in 1996 with
the phase in of customer choice for electric  generation  suppliers completed on
January 1, 2001. The Company  continues to deliver power to homes and businesses
through its  distribution  system,  which  remains  regulated  by the PPUC.  The
Company's rates have been  restructured to itemize  (unbundle) the current price
of electricity into its component elements - including generation, transmission,
distribution  and stranded cost recovery.  In the event  customers  obtain power
from an alternative  source,  the generation  portion of the Company's  rates is
excluded from their bill and the customers  receive a generation charge from the
alternative  supplier.  The stranded cost recovery portion of rates provides for
recovery  of  certain  amounts  not  otherwise   considered   recoverable  in  a
competitive generation market, including regulatory assets.

          In 1998, the PPUC  authorized the Company's rate  restructuring  plan,
which  essentially  resulted in the  deregulation  of the  Company's  generation
business.  The  Company  was  required  to  remove  from its  balance  sheet all
regulatory assets and liabilities  related to its generation business and assess
all other assets for impairment.  The SEC issued interpretive guidance regarding
asset impairment  measurement  concluding that any  supplemental  regulated cash
flows such as a competitive  transition charge (CTC) should be excluded from the
cash  flows of assets in a portion of the  business  not  subject to  regulatory
accounting practices. If those assets are impaired, a regulatory asset should be
established  if  the  costs  are  recoverable  through  regulatory  cash  flows.
Consistent  with the SEC guidance,  the Company  reduced its nuclear  generating
unit  investments by approximately  $305 million,  of which  approximately  $227
million was  recognized  as a regulatory  asset to be recovered  through the CTC
over a seven-year transition period; the remaining net amount of $78 million was
written off.  The Company is entitled to recover $236 million of stranded  costs
through the CTC that began in 1999 and ends in 2006.  The  Company's  net assets
included in utility plant relating to the  operations for which the  application
of SFAS No. 71,  "Accounting  for the  Effects of Certain  Types of  Regulation"
(SFAS 71) was discontinued were $82 million as of December 31, 2002.

     (C)   UTILITY PLANT AND DEPRECIATION-

          Utility plant reflects the original cost of  construction  (except for
nuclear  generating units which were adjusted to fair value),  including payroll
and related costs such as taxes,  employee benefits,  administrative and general
costs,  and interest costs.  The Company's  accounting  policy for planned major
maintenance projects is to recognize liabilities as they are incurred.

          The Company  provides for  depreciation  on a  straight-line  basis at
various rates over the estimated lives of property included in plant in service.
The annual composite rate for electric plant was approximately  2.9% in 2002 and
2001 and 2.6% in 2000.

          Annual  depreciation  expense includes  approximately $1.6 million for
future  decommissioning  costs applicable to the Company's ownership interest in
three nuclear  generating  units (Beaver Valley Units 1 and 2 and Perry Unit 1).
The  Company's  share of the future  obligation to  decommission  these units is
approximately $354 million in current dollars and (using a 4.0% escalation rate)
approximately $695 million in future dollars.  The estimated  obligation and the
escalation  rate were  developed  based on site specific  studies.  Payments for
decommissioning are expected to begin in 2016, when actual  decommissioning work
begins. The Company has recovered  approximately $17 million for decommissioning
through its electric rates from customers through December 31, 2002. The Company
has also

                                       17

<PAGE>

recognized  an estimated  liability  of  approximately  $5.3 million  related to
decontamination and decommissioning of nuclear enrichment facilities operated by
the United States  Department of Energy, as required by the Energy Policy Act of
1992.

          In June 2001,  the Financial  Accounting  Standards  Board issued SFAS
143, "Accounting for Asset Retirement  Obligations".  The new statement provides
accounting  standards  for  retirement   obligations  associated  with  tangible
long-lived assets,  with adoption required by January 1, 2003. SFAS 143 requires
that the fair  value  of a  liability  for an  asset  retirement  obligation  be
recorded in the period in which it is incurred.  The associated asset retirement
costs are  capitalized as part of the carrying  amount of the long-lived  asset.
Over time the  capitalized  costs are  depreciated  and the present value of the
asset retirement  liability increases,  resulting in a period expense.  However,
rate-regulated  entities may  recognize a  regulatory  asset or liability if the
criteria for such  treatment are met. Upon  retirement,  a gain or loss would be
recorded  if the cost to  settle  the  retirement  obligation  differs  from the
carrying amount.

          The Company has  identified  applicable  legal  obligations as defined
under the new standard,  principally  for nuclear  power plant  decommissioning.
Upon adoption of SFAS 143 in January 2003, asset retirement costs of $78 million
were recorded as part of the carrying  amount of the related  long-lived  asset,
offset by accumulated  depreciation of $9 million. Due to the increased carrying
amount,  the related  long-lived assets were tested for impairment in accordance
with SFAS 144,  "Accounting for Impairment or Disposal of Long-Lived Assets". No
impairment was indicated. The asset retirement liability at the date of adoption
will be $121  million.  As of  December  31,  2002,  the  Company  had  recorded
decommissioning  liabilities  of  $120  million.  The  change  in the  estimated
liabilities  resulted  from  changes in  methodology  and  various  assumptions,
including changes in the projected dates for decommissioning.

          Management expects that the ultimate nuclear decommissioning costs for
the Company  will be  recovered  through its  regulated  rates.  Therefore,  the
Company  recognized a regulatory  liability of $69 million upon adoption of SFAS
143 for the transition  amounts  related to  establishing  the asset  retirement
obligations  for  nuclear   decommissioning  for  the  Company.   The  remaining
cumulative  effect  adjustment to recognize the  undepreciated  asset retirement
cost and the asset retirement liability offset by the reversal of the previously
recorded decommissioning liabilities was a $1.1 million decrease to income ($0.6
million net of tax).

     (D)   COMMON OWNERSHIP OF GENERATING FACILITIES-

          The Company,  together  with OE and other  affiliated  companies,  The
Cleveland  Electric  Illuminating  Company (CEI) and The Toledo  Edison  Company
(TE), own, as tenants in common,  various power generating  facilities.  Each of
the  companies  is  obligated  to pay a share of the costs  associated  with any
jointly owned  facility in the same  proportion  as its interest.  The Company's
portion of operating  expenses  associated  with  jointly  owned  facilities  is
included in the  corresponding  operating  expenses on the Statements of Income.
The amounts  reflected on the Balance  Sheet under utility plant at December 31,
2002 include the following:

<TABLE>
<CAPTION>

                                                  Utility       Accumulated         Construction    Company's
                                                 Plant in       Provision for          Work in      Ownership
               Generating Units                  Service        Depreciation          Progress       Interest
-------------------------------------------------------------------------------------------------------------
                                                                     (In millions)
      <S>                                        <C>             <C>                 <C>             <C>
      W. H. Sammis #7.......................     $ 64.1            $ 24.4              $ --            20.80%
      Bruce Mansfield
        #1, #2 and #3.......................      185.9             114.8                2.7           16.38%
      Beaver Valley #1 and #2...............       52.6              13.7               32.9           39.37%
      Perry #1..............................        3.7               0.9                1.0            5.24%
      -------------------------------------------------------------------------------------------------------
          Total.............................     $306.3            $153.8              $36.6
=============================================================================================================
</TABLE>


     (E)  NUCLEAR FUEL-

          OES Fuel, Incorporated,  a wholly owned subsidiary of OE, had been the
sole lessor for the  Company's  nuclear  fuel  requirements.  The Company and OE
replaced that lease arrangement with direct ownership and nuclear fuel financing
by the Company and OE. The Company  amortizes  the cost of nuclear fuel based on
the rate of consumption.

     (F)  STOCK-BASED COMPENSATION-

          FirstEnergy  applies the  recognition  and  measurement  principles of
Accounting  Principles  Board  Opinion  No. 25 (APB 25),  "Accounting  for Stock
Issued  to  Employees"  and  related   Interpretations  in  accounting  for  its
stock-based  compensation plans (see Note 3B). No material  stock-based employee
compensation  expense is  reflected in net income as all options  granted  under
those plans had an exercise  price equal to the market  value of the  underlying
common stock on the grant date resulting in substantially no intrinsic value.

                                       18

<PAGE>

          If FirstEnergy had accounted for employee stock options under the fair
value method,  a higher value would have been  assigned to the options  granted.
The weighted average assumptions used in valuing the options and their resulting
estimated fair values would be as follows:


                                        2002           2001            2000
    ----------------------------------------------------------------------------
    Valuation assumptions:
      Expected option term (years)...  8.1            8.3             7.6
      Expected volatility............  23.31%         23.45%          21.77%
      Expected dividend yield........   4.36%          5.00%           6.68%
      Risk-free interest rate........   4.60%          4.67%           5.28%
    Fair value per option............  $6.45          $4.97           $2.86
    ----------------------------------------------------------------------------


          The effects of applying fair value accounting to  FirstEnergy's  stock
options would not be material to the Company's net income.

     (G)  INCOME TAXES-

          Details  of the  total  provision  for  income  taxes are shown on the
Statements of Taxes. Deferred income taxes result from timing differences in the
recognition of revenues and expenses for tax and accounting purposes. Investment
tax credits,  which were deferred when  utilized,  are being  amortized over the
recovery period of the related property. The liability method is used to account
for deferred income taxes.  Deferred  income tax liabilities  related to tax and
accounting basis differences are recognized at the statutory income tax rates in
effect when the  liabilities are expected to be paid. The Company is included in
FirstEnergy's  consolidated  federal  income tax return.  The  consolidated  tax
liability  is  allocated  on a  "stand-alone"  company  basis,  with the Company
recognizing any tax losses or credits it contributed to the consolidated return.

     (H)  RETIREMENT BENEFITS-

          FirstEnergy's  trusteed,  noncontributory defined benefit pension plan
covers  almost  all of  the  Company's  full-time  employees.  Upon  retirement,
employees receive a monthly pension based on length of service and compensation.
On December 31, 2001, the  FirstEnergy  pension plan was merged with the pension
plans of GPU,  Inc.,  which  merged with  FirstEnergy  on November 7, 2001.  The
Company uses the projected  unit credit method for funding  purposes and was not
required to make pension contributions during the three years ended December 31,
2002.  The assets of the  FirstEnergy  pension plan consist  primarily of common
stocks, United States government bonds and corporate bonds.

          The  Company  provides  a  minimum  amount  of  noncontributory   life
insurance to retired employees in addition to optional  contributory  insurance.
Health care benefits, which include certain employee contributions,  deductibles
and copayments,  are also available to retired employees,  their dependents and,
under  certain  circumstances,  their  survivors.  The  Company  pays  insurance
premiums  to cover a portion  of these  benefits  in excess of set  limits;  all
amounts up to the limits are paid by the  Company.  The Company  recognizes  the
expected cost of providing other postretirement  benefits to employees and their
beneficiaries  and covered  dependents  from the time  employees are hired until
they become eligible to receive those benefits.

          As a result of the reduced market value of FirstEnergy's pension plan
assets, it was required to recognize an additional minimum liability as
prescribed by SFAS 87 and SFAS 132, "Employers' Disclosures about Pension and
Postretirement Benefits," as of December 31, 2002. FirstEnergy's accumulated
benefit obligation of $3.438 billion exceeded the fair value of plan assets
($2.889 billion) resulting in a minimum pension liability of $548.6 million.
FirstEnergy eliminated its prepaid pension asset of $286.9 million (Company -
$8.8 million) and established a minimum liability of $548.6 million (Company -
$11.7 million), recording an intangible asset of $78.5 million (Company - $3.6
million) and reducing OCI by $444.2 million (Company - $9.9 million) (recording
a related deferred tax asset of $312.8 million (Company - $7.0 million)). The
charge to OCI will reverse in future periods to the extent the fair value of
trust assets exceed the accumulated benefit obligation. The amount of pension
liability recorded as of December 31, 2002, increased due to the lower discount
rate and asset returns assumed as of December 31, 2002.

                                       19

<PAGE>


          The  following  sets forth the funded  status of the plans and amounts
recognized on FirstEnergy's Consolidated Balance Sheets as of December 31:

<TABLE>
<CAPTION>
                                                                                            Other
                                                            Pension Benefits        Postretirement Benefits
                                                            ----------------        -----------------------
                                                            2002        2001           2002       2001
              --------------------------------------------------------------------------------------------
                                                                           (In millions)
              <S>                                         <C>         <C>          <C>          <C>
              Change in benefit obligation:
              Benefit obligation as of January 1........  $3,547.9    $1,506.1     $ 1,581.6    $   752.0
              Service cost..............................      58.8        34.9          28.5         18.3
              Interest cost ............................     249.3       133.3         113.6         64.4
              Plan amendments...........................      --           3.6        (121.1)        --
              Actuarial loss............................     268.0       123.1         440.4         73.3
              Voluntary early retirement program........      --          --            --            2.3
              GPU acquisition...........................     (11.8)    1,878.3         110.0        716.9
              Benefits paid.............................    (245.8)     (131.4)        (83.0)       (45.6)
              ---------------------------------------------------------------------------------------------
              Benefit obligation as of December 31......   3,866.4     3,547.9       2,070.0      1,581.6
              ---------------------------------------------------------------------------------------------

              Change in fair value of plan assets:
              Fair value of plan assets as of January 1.   3,483.7     1,706.0         535.0         23.0
              Actual return on plan assets..............  . (348.9)        8.1         (57.1)        12.7
              Company contribution .....................      --          --            37.9         43.3
              GPU acquisition...........................      --       1,901.0          --          462.0
              Benefits paid..............................   (245.8)     (131.4)        (42.5)        (6.0)
              ---------------------------------------------------------------------------------------------
              Fair value of plan assets as of December 31  2,889.0     3,483.7         473.3        535.0
              ---------------------------------------------------------------------------------------------

              Funded status of plan.....................    (977.4)      (64.2)     (1,596.7)    (1,046.6)
              Unrecognized actuarial loss...............   1,185.8       222.8         751.6        212.8
              Unrecognized prior service cost...........      78.5        87.9        (106.8)        17.7
              Unrecognized net transition obligation....      --          --            92.4        101.6
              --------------------------------------------------------------------------------------------
              Net amount recognized.....................  $  286.9    $  246.5     $  (859.5)   $  (714.5)
              =============================================================================================

              Consolidated Balance Sheets classification:
              Prepaid (accrued) benefit cost............  $ (548.6)   $  246.5     $  (859.5)   $  (714.5)
              Intangible asset..........................      78.5        --            --           --
              Accumulated other comprehensive loss......     757.0        --            --           --
              --------------------------------------------------------------------------------------------
              Net amount recognized.....................  $  286.9    $  246.5     $  (859.5)   $  (714.5)
              =============================================================================================
              Company's share of net amount recognized..  $    8.8    $   18.1     $   (26.4)   $   (37.4)
              =============================================================================================
              Assumptions used as of December 31:
              Discount rate.............................      6.75%       7.25%         6.75%       7.25%
              Expected long-term return on plan assets..      9.00%      10.25%         9.00%      10.25%
              Rate of compensation increase.............      3.50%       4.00%         3.50%       4.00%

<FN>

FirstEnergy's net pension and other  postretirement  benefit costs for the three
years ended December 31, 2002 were computed as follows:
</FN>
</TABLE>

<TABLE>
<CAPTION>
                                                                                           Other
                                                       Pension Benefits             Postretirement Benefits
                                                 ------------------------         -------------------------
                                                 2002      2001      2000         2002      2001     2000
     ------------------------------------------------------------------------------------------------------
                                                                      (In millions)

    <S>                                       <C>       <C>      <C>            <C>         <C>       <C>
     Service cost                              $  58.8   $  34.9  $  27.4        $ 28.5     $18.3     $11.3
     Interest cost                               249.3     133.3    104.8         113.6      64.4      45.7
     Expected return on plan assets             (346.1)   (204.8)  (181.0)        (51.7)     (9.9)     (0.5)
     Amortization of transition obligation (asset)--        (2.1)    (7.9)          9.2       9.2       9.2
     Amortization of prior service cost            9.3       8.8      5.7           3.2       3.2       3.2
     Recognized net actuarial loss (gain)         --        --       (9.1)         11.2       4.9      --
     Voluntary early retirement program           --         6.1     17.2          --         2.3      --
     ------------------------------------------------------------------------------------------------------
     Net periodic benefit cost (income)        $ (28.7)  $ (23.8) $ (42.9)       $114.0     $92.4     $68.9
     ======================================================================================================
     Company's share of net benefit cost.....  $   0.4   $  (0.7) $  (3.6)       $  2.1     $ 4.0     $ 7.5
     ------------------------------------------------------------------------------------------------------
</TABLE>


          The composite  health care cost trend rate assumption is approximately
10%-12% in 2003,  9% in 2004 and 8% in 2005,  decreasing  to 5% in later  years.
Assumed  health care cost trend rates have a  significant  effect on the amounts
reported  for the health  care plan.  An  increase in the health care cost trend
rate  assumption by one  percentage  point would  increase the total service and
interest  cost  components  by  $20.7  million  and the  postretirement  benefit
obligation  by  $232.2  million.  A  decrease  in  the  same  assumption  by one
percentage  point would decrease the total service and interest cost  components
by $16.7 million and the postretirement benefit obligation by $204.3 million.

                                       20

<PAGE>


     (I)  TRANSACTIONS WITH AFFILIATED COMPANIES-

          Operating  revenues,  operating  expenses  and  other  income  include
transactions  with  affiliated  companies,   primarily  OE,  CEI,  TE,  American
Transmission  Systems,  Inc.  (ATSI),  FirstEnergy  Solutions  Corp.  (FES)  and
FirstEnergy  Service  Company  (FECO).  The Ohio transition plan resulted in the
corporate  separation of FirstEnergy's  regulated and unregulated  operations in
2001.  Unregulated operations under FES now operate the generation businesses of
the Company,  OE, CEI and TE. As a result, the Company entered into power supply
agreements (PSA) whereby FES purchases all of the Company's  nuclear  generation
and the  Company  purchases  its power  from FES to meet its  "provider  of last
resort"   obligations.   The   reduction   in  revenues   for  Bruce   Mansfield
administrative and general charges and costs for FirstEnergy support services in
2001 and 2002  from 2000  levels  reflects  the  transfer  of fossil  generation
operations  to FES. In 2002,  the Company and OE  terminated  their nuclear fuel
leasing  arrangement  with OES Fuel and now own their nuclear fuel.  The primary
affiliated companies transactions, including the effects of the PSA beginning in
2001,  the sale and  leaseback of the Company's  transmission  assets to ATSI in
September  2000 and  FirstEnergy's  providing  support  services at cost, are as
follows:


                                              2002         2001          2000
-------------------------------------------------------------------------------
                                                      (In millions)
Operating Revenues:
PSA revenues with FES.....................   $138.0        $151.5       $  --
Generating units rent with FES............     20.2          20.2          --
Electric sales to affiliated utilitie            --            --        57.6
Bruce Mansfield administrative and
   general charges........................       --            --         2.9
Ground lease with ATSI....................      1.3           1.3         0.7

Operating Expenses:
Nuclear fuel leased from OES Fuel.........      4.8          18.7        20.3
Purchased power from affiliated utilities.       --            --         7.1
Purchased power under PSA.................    157.0         152.7          --
Transmission facilities rentals
   (including ATSI rents).................     13.3           9.9         5.7
Nuclear operations administrative and
   generation charges.....................     20.2          18.6        15.0
FirstEnergy support services..............      8.5          10.1        27.4

Other Income:
Interest income from ATSI..................     2.6           2.6         0.9
Interest income from FES...................     0.5           0.5          --
-------------------------------------------------------------------------------


          FirstEnergy does not bill directly or allocate any of its costs to any
subsidiary company. Costs are allocated to the Company from its affiliates,  GPU
Service,  Inc. and FECO, both subsidiaries of FirstEnergy Corp. and both "mutual
service  companies"  as defined in Rule 93 of the 1935  Public  Utility  Holding
Company Act (PUHCA). The majority of costs are directly billed or assigned at no
more than cost as  determined  by PUHCA  Rule 91.  The  remaining  costs are for
services  that are provided on behalf of more than one  company,  or costs that
cannot be precisely  identified and are allocated  using formulas that are filed
annually  with the SEC on Form  U-13-60.  The current  allocation  or assignment
formulas used and their bases include  multiple  factor  formulas;  the ratio of
each company's  amount of  FirstEnergy's  aggregate  direct  payroll,  number of
employees, asset balances,  revenues, number of customers and other factors; and
specific  departmental charge ratios.  Management believes that these allocation
methods are reasonable.

     (J)  SUPPLEMENTAL CASH FLOWS INFORMATION-

          All temporary cash  investments  purchased with an initial maturity of
three months or less are reported as cash  equivalents  on the Balance Sheets at
cost,  which  approximates  their  fair  market  value.  Noncash  financing  and
investing  activities  included  capital  lease  transactions  amounting to $1.5
million,  $21.6  million and $21.2  million  for the years 2002,  2001 and 2000,
respectively.

          All  borrowings  with  initial  maturities  of less  than one year are
defined as  financial  instruments  under GAAP and are  reported  on the Balance
Sheets at cost, which  approximates  their fair market value. The following sets
forth the  approximate  fair  value and  related  carrying  amounts of all other
long-term debt,  preferred stock subject to mandatory redemption and investments
other than cash and cash equivalents as of December 31:

                                       21

<PAGE>


                                                      2002              2001
--------------------------------------------------------------------------------
                                              Carrying    Fair   Carrying   Fair
                                                Value    Value     Value   Value
                                              --------   -----   --------  -----
                                                         (In millions)
Long-term debt..............................    $252     $260      $252    $262
Preferred stock.............................      14       14        15      15
Investments other than cash and
  cash equivalents..........................     161      165       160     162
--------------------------------------------------------------------------------


          The fair values of  long-term  debt and  preferred  stock  reflect the
present value of the cash  outflows  relating to those  securities  based on the
current  call  price,  the yield to  maturity  or the  yield to call,  as deemed
appropriate at the end of each respective year. The yields assumed were based on
securities  with similar  characteristics  offered by  corporations  with credit
ratings similar to the Company's ratings.

          The fair value of  investments  other  than cash and cash  equivalents
represent cost (which  approximates fair value) or the present value of the cash
inflows  based on the  yield to  maturity.  The  yields  assumed  were  based on
financial instruments with similar characteristics and terms.  Investments other
than  cash and cash  equivalents  consist  primarily  of  decommissioning  trust
investments. The Company has no securities held for trading purposes.

          The  investment  policy for the  nuclear  decommissioning  trust funds
restricts  or limits  the  ability  to hold  certain  types of assets  including
private or direct placements,  warrants,  securities of the Company, investments
in companies  owning  nuclear power  plants,  financial  derivatives,  preferred
stocks,  securities  convertible  into common stock and  securities of the trust
fund's custodian or managers and their parents or subsidiaries.  The investments
that are held in the decommissioning trusts (included as "Investments other than
cash and cash  equivalents"  in the table above)  consist of equity  securities,
government bonds and corporate bonds.  Unrealized gains and losses applicable to
the  decommissioning  trusts have been recognized in the trust investment with a
corresponding change to the decommissioning  liability.  In conjunction with the
adoption  of SFAS 143 on  January  1,  2003,  unrealized  gains or  losses  were
reclassified  to OCI in accordance  with SFAS 115.  Realized  gains (losses) are
recognized as additions (reductions) to trust asset balances. For the year 2002,
net realized gains (losses) were  approximately  $(0.3) million and interest and
dividend income totaled approximately $5.2 million.

     (K)  REGULATORY ASSETS-

          The Company recognizes, as regulatory assets, costs which the FERC and
PPUC have authorized for recovery from customers in future periods. Without such
authorization,  the costs  would have been  charged to income as  incurred.  All
regulatory  assets are expected to continue to be recovered from customers under
the Company's rate restructuring plan. Based on the rate restructuring plan, the
Company continues to bill and collect cost-based rates relating to the Company's
nongeneration  operations  and  continues  the  application  of SFAS 71 to these
operations.

          Net  regulatory  assets on the  Balance  Sheets are  comprised  of the
following:

                                                      2002             2001
-----------------------------------------------------------------------------
                                                           (In millions)
Competitive transition charge..................      $135.7            $182.7
Customer receivables for future income taxes...        10.3              13.6
Loss on reacquired debt........................         6.9               6.9
Employee postretirement benefit costs..........         2.8               3.6
Other..........................................         1.2               2.0
-----------------------------------------------------------------------------
     Total.....................................      $156.9            $208.8
=============================================================================


2.   LEASES

          The Company leases office space and other property and equipment under
cancelable and noncancelable  leases.  Consistent with the regulatory treatment,
the rentals for capital and operating  leases are charged to operating  expenses
on the  Statements of Income.  Such costs for the three years ended December 31,
2002, are summarized as follows:

                                             2002            2001          2000
   ----------------------------------------------------------------------------
                                                        (In millions)
   Operating leases
      Interest element...................    $0.1           $--            $0.3
      Other..............................     0.2             0.1           0.8
   Capital leases
      Interest element...................    --              --             0.4
      Other..............................     0.1             0.1           0.3
   ----------------------------------------------------------------------------
   Total rentals.........................   $ 0.4           $ 0.2          $1.8
   ============================================================================

                                       22
<PAGE>

          The future minimum lease payments as of December 31, 2002, are:

                                            Capital            Operating
                                            Leases              Leases
  ----------------------------------------------------------------------
                                                   (In millions)
  2003...................................    $0.1               $0.1
  2004...................................     --                 0.1
  2005...................................     --                 0.1
  2006...................................     --                 0.1
  2007...................................     --                 0.1
  Years thereafter.......................     --                 0.7
  ------------------------------------------------------------------
  Total minimum lease payments...........     0.1               $1.2
                                                                ====
  Executory costs........................     0.1
  ------------------------------------------------
  Net minimum lease payments.............     --
  Interest portion.......................     --
  ------------------------------------------------
  Present value of net minimum
    lease payments.......................     --
  Less current portion...................     --
  ------------------------------------------------
  Noncurrent portion.....................    $--
  ================================================


3.   CAPITALIZATION

     (A)  RETAINED EARNINGS-

          Under  the  Company's   Charter,   the  Company's   retained  earnings
unrestricted  for payment of cash  dividends on the Company's  common stock were
$41.0 million as of December 31, 2002.

     (B)  STOCK COMPENSATION PLANS-

          In 2001,  FirstEnergy  assumed  responsibility for two new stock-based
plans as a result of its acquisition of GPU. No further stock-based compensation
can be awarded under the GPU, Inc.  Stock Option and  Restricted  Stock Plan for
MYR Group Inc. Employees (MYR Plan) or the 1990 Stock Plan for Employees of GPU,
Inc. and  Subsidiaries  (GPU Plan).  All options and restricted stock under both
Plans have been converted into FirstEnergy options and restricted stock. Options
under the GPU Plan became fully  vested on November 7, 2001,  and will expire on
or before June 1, 2010.  Under the MYR Plan,  all options and  restricted  stock
maintained their original  vesting periods,  which range from one to four years,
and will expire on or before December 17, 2006.

          Additional stock based plans  administered by FirstEnergy  include the
Centerior  Equity  Plan (CE Plan) and the  FirstEnergy  Executive  and  Director
Incentive Compensation Plan (FE Plan). All options are fully vested under the CE
Plan, and no further awards are permitted. Outstanding options will expire on or
before  February 25, 2007.  Under the FE Plan,  total awards  cannot exceed 22.5
million  shares of common  stock or their  equivalent.  Only stock  options  and
restricted stock have been granted, with vesting periods ranging from six months
to seven years.

          Collectively,  the above  plans are  referred  to as the FE  Programs.
Restricted common stock grants under the FE Programs were as follows:

                                                  2002        2001        2000
         -----------------------------------------------------------------------

        Restricted common shares granted         36,922      133,162     208,400
        Weighted average market price            $36.04       $35.68      $26.63
        Weighted average vesting period (years)     3.2          3.7         3.8
        Dividends restricted                      Yes          *            Yes

         *  FE Plan dividends are paid as restricted stock on 4,500
            shares; MYR Plan dividends are paid as unrestricted cash
            on 128,662 shares


          Under  the  Executive  Deferred  Compensation  Plan  (EDCP),   covered
employees can direct a portion of their Annual  Incentive Award and/or Long-Term
Incentive  Award into an unfunded  FirstEnergy  Stock Account to receive  vested
stock units.  An  additional  20% premium is received in the form of stock units
based on the amount  allocated to the FirstEnergy  Stock Account.  Dividends are
calculated  quarterly  on stock  units  outstanding  and are paid in the form of
additional  stock  units.   Upon  withdrawal,   stock  units  are  converted  to
FirstEnergy  shares.  Payout  typically  occurs  three  years  from  the date of
deferral;  however,  an  election  can be made in the year  prior to  payout  to
further  defer shares into a retirement  stock account that will pay out in cash
upon  retirement.  As of  December  31,  2002,  there were  296,008  stock units
outstanding.

                                       23

<PAGE>

          Stock option activities under the FE Programs for the past three years
were as follows:

                                              Number of       Weighted Average
            Stock Option Activities            Options         Exercise Price
            --------------------------------------------------------------------
            Balance, January 1, 2002          2,153,369           $25.32
            (159,755 options exercisable)                          24.87

              Options granted                 3,011,584            23.24
              Options exercised                  90,491            26.00
              Options forfeited                  52,600            22.20
            Balance, December 31, 2000        5,021,862            24.09
            (473,314 options exercisable)                          24.11

              Options granted                 4,240,273            28.11
              Options exercised                 694,403            24.24
              Options forfeited                 120,044            28.07
            Balance, December 31, 2001        8,447,688            26.04
            (1,828,341 options exercisable)                        24.83

              Options granted                 3,399,579            34.48
              Options exercised               1,018,852            23.56
              Options forfeited                 392,929            28.19
            Balance, December 31, 2002       10,435,486            28.95
            (1,400,206 options exercisable)                        26.07


          As of December 31, 2002, the weighted  average  remaining  contractual
life of outstanding stock options was 7.6 years.

          No material stock-based employee  compensation expense is reflected in
net income for stock  options  granted  under the above plans since the exercise
price was equal to the market value of the underlying  common stock on the grant
date.  The effect of  applying  fair value  accounting  to  FirstEnergy's  stock
options is summarized in Note 1F - "Stock-Based Compensation."

     (C)  PREFERRED STOCK-

          The Company's 7.75% series of preferred stock has a restriction  which
prevents early  redemption  prior to July 2003. All other preferred stock may be
redeemed by the Company in whole, or in part, with 30-60 days' notice.

     (D)  PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION-

          The Company's 7.625% series has an annual sinking fund requirement for
7,500 shares.

     (E)  LONG-TERM DEBT-

          The Company has a first mortgage  indenture under which it issues from
time to time first  mortgage  bonds  secured by a direct first  mortgage lien on
substantially  all of its  property  and  franchises,  other  than  specifically
excepted  property.  The Company has various debt covenants  under its financing
arrangements.  The  most  restrictive  of  the  debt  covenants  relate  to  the
nonpayment  of interest  and/or  principal on debt which could trigger a default
and the  maintenance  of minimum fixed charge ratios and debt to  capitalization
ratios. There also exists cross-default  provisions among financing arrangements
of FirstEnergy and the Company.

          Based  on the  amount  of bonds  authenticated  by the  mortgage  bond
trustee  through  December 31,  2002,  the  Company's  annual  improvement  fund
requirements for all bonds issued under its first mortgage  indenture amounts to
$9.2  million.  The  Company  expects to deposit  funds with its  mortgage  bond
trustee in 2003 that will then be withdrawn upon the surrender for  cancellation
of a like principal amount of bonds,  which are specifically  authenticated  for
such purposes against unfunded property  additions or against previously retired
bonds.  This  method can result in minor  increases  in the amount of the annual
sinking fund requirement.

          Sinking  fund  requirements  for first  mortgage  bonds  and  maturing
long-term debt  (excluding  capital leases) during the next five years are $65.8
million  in 2003,  $40.7  million  in 2004 and $1.0  million  in each  year 2005
through  2007.  Included in these  amounts are various  variable  interest  rate
long-term debt which have  provisions by which  individual debt holders have the
option to "put back" or require the respective  debt issuer to redeem their debt
at those times when the interest  rate may change  prior to its  maturity  date.
Those  amounts are $25  million  and $5 million in 2003 and 2004,  respectively,
which is the next time debt holders may exercise this provision.

                                       24

<PAGE>

          The Company's  obligations to repay certain  pollution control revenue
bonds are secured by several series of first mortgage bonds.  Certain  pollution
control revenue bonds are entitled to the benefit of irrevocable bank letters of
credit of $10.4 million and noncancelable  municipal bond insurance  policies of
$32.9 million to pay principal of, or interest on, the pollution control revenue
bonds.  To the extent  that  drawings  are made  under the  letters of credit or
policies,  the Company is entitled to a credit  against its  obligation to repay
the related bond.  The Company pays an annual fee of 1.375% of the amount of the
letters of credit to the issuing bank and is obligated to reimburse the bank for
any drawings thereunder.

     (F)  COMPREHENSIVE INCOME-

          Comprehensive   income   includes   net  income  as  reported  on  the
Consolidated  Statements of Income and all other changes in common stockholder's
equity  except those  resulting  from  transactions  with OE. As of December 31,
2002,  accumulated other comprehensive loss consisted of a minimum liability for
unfunded retirement benefits of $9.9 million.

4.   SHORT-TERM BORROWINGS:

          The Company may borrow from  affiliates on a short-term  basis.  As of
December 31, 2002, the Company had no short-term borrowings.

5.   COMMITMENTS AND CONTINGENCIES:

     (A)  CAPITAL EXPENDITURES-

          The Company's current forecast reflects  expenditures of approximately
$123 million for property  additions and improvements  from 2003-2007,  of which
approximately  $53 million is applicable  to 2003.  Investments  for  additional
nuclear fuel during the 2003-2007 period are estimated to be  approximately  $42
million,  of which  approximately  $19 million applies to 2003.  During the same
periods,  the Company's  nuclear fuel  investments are expected to be reduced by
approximately $34 million and $17 million,  respectively, as the nuclear fuel is
consumed.

     (B)  NUCLEAR INSURANCE-

          The  Price-Anderson  Act  limits the public  liability  relative  to a
single incident at a nuclear power plant to $9.5 billion.  The amount is covered
by a combination of private insurance and an industry retrospective rating plan.
Based on its  ownership  interests  in the Beaver  Valley  Station and the Perry
Plant,   the  Company's   maximum   potential   assessment  under  the  industry
retrospective  rating plan (assuming the other  affiliate  co-owners  contribute
their  proportionate  shares of any assessments under the  retrospective  rating
plan) would be $74.0  million per incident but not more than $8.4 million in any
one year for each incident.

          The Company is also  insured as to its  interest in Beaver  Valley and
Perry under policies issued to the operating company for each plant. Under these
policies,   up  to  $2.75   billion  is  provided   for   property   damage  and
decontamination  and  decommissioning  costs.  The  Company  has  also  obtained
approximately  $222.1 million of insurance  coverage for replacement power costs
for its interests in Beaver Valley and Perry. Under these policies,  the Company
can be assessed a maximum of  approximately  $13.1  million for incidents at any
covered nuclear  facility  occurring during a policy year which are in excess of
accumulated funds available to the insurer for paying losses.

          The Company  intends to maintain  insurance  against  nuclear risks as
described  above as long as it is  available.  To the  extent  that  replacement
power, property damage, decontamination, decommissioning, repair and replacement
costs  and other  such  costs  arising  from a  nuclear  incident  at any of the
Company's  plants  exceed  the policy  limits of the  insurance  in effect  with
respect to that plant, to the extent a nuclear  incident is determined not to be
covered by the Company's  insurance  policies,  or to the extent such  insurance
becomes  unavailable  in the future,  the Company  would remain at risk for such
costs.

     (C)  ENVIRONMENTAL MATTERS-

          Various federal, state and local authorities regulate the Company with
regard to air and water  quality  and other  environmental  matters.  Generation
operations and any related  additional  capital  expenditures for  environmental
compliance are the responsibility of FirstEnergy's competitive services business
unit.

          The Company is  required to meet  federally  approved  sulfur  dioxide
(SO2) regulations.  Violations of such regulations can result in shutdown of the
generating unit involved and/or civil or criminal penalties of up to $31,500 for
each day the unit is in violation. The Environmental Protection Agency (EPA) has
an  interim  enforcement  policy  for SO2  regulations  in Ohio that  allows for
compliance based on a 30-day averaging  period.  The Company cannot predict what
action the EPA may take in the future with  respect to the  interim  enforcement
policy.

                                       25

<PAGE>

          The  Company  believes  it is in  compliance  with the current SO2 and
nitrogen oxides (NOx) reduction  requirements under the Clean Air Act Amendments
of 1990.  SO2  reductions  are being  achieved  by  burning  lower-sulfur  fuel,
generating more electricity from  lower-emitting  plants,  and/or using emission
allowances.  NOx reductions are being achieved through  combustion  controls and
the generation of more electricity at lower-emitting  plants. In September 1998,
the EPA finalized  regulations  requiring  additional  NOx  reductions  from the
Company's Pennsylvania facilities.  The EPA's NOx Transport Rule imposes uniform
reductions of NOx emissions (an  approximate  85% reduction in utility plant NOx
emissions from projected 2007 emissions)  across a region of nineteen states and
the District of Columbia, including Ohio and Pennsylvania, based on a conclusion
that such NOx emissions are contributing significantly to ozone pollution in the
eastern United States.  State  Implementation Plans (SIP) must comply by May 31,
2004 with  individual  state NOx budgets  established  by the EPA.  Pennsylvania
submitted a SIP that requires  compliance  with the NOx budgets at the Company's
Pennsylvania facilities by May 1, 2003.

          In July 1997, the EPA promulgated  changes in the National Ambient Air
Quality  Standard  (NAAQS)  for ozone  emissions  and  proposed  a new NAAQS for
previously  unregulated  ultra-fine  particulate  matter.  In May 1999, the U.S.
Court of Appeals found  constitutional and other defects in the new NAAQS rules.
In February 2001, the U.S.  Supreme Court upheld the new NAAQS rules  regulating
ultra-fine  particulates  but found defects in the new NAAQS rules for ozone and
decided that the EPA must revise those rules. The future cost of compliance with
these  regulations  may be  substantial  and  will  depend  if and how  they are
ultimately  implemented  by the states in which the  Company  operates  affected
facilities.

          In 1999 and 2000,  the EPA  issued  Notices  of  Violation  (NOV) or a
Compliance Order to nine utilities covering 44 power plants, including the W. H.
Sammis  Plant.  In addition,  the U.S.  Department  of Justice filed eight civil
complaints against various investor-owned utilities,  which included a complaint
against the Company and OE in the U.S.  District Court for the Southern District
of Ohio, for which hearings began February 3, 2003. The NOV and complaint allege
violations of the Clean Air Act based on operation and maintenance of the Sammis
Plant dating back to 1984. The complaint requests permanent injunctive relief to
require  the  installation  of "best  available  control  technology"  and civil
penalties of up to $27,500 per day of violation.  Although unable to predict the
outcome of these proceedings,  the Company and OE believe the Sammis Plant is in
full  compliance  with the Clean Air Act and the NOV and  complaint  are without
merit.  Penalties  could be  imposed if the Sammis  Plant  continues  to operate
without  correcting  the  alleged  violations  and a court  determines  that the
allegations  are valid.  The Sammis  Plant  continues  to  operate  while  these
proceedings are pending.

          In  December  2000,  the EPA  announced  it  would  proceed  with  the
development of  regulations  regarding  hazardous air  pollutants  from electric
power  plants.  The EPA  identified  mercury as the  hazardous  air pollutant of
greatest  concern.  The EPA  established  a schedule to propose  regulations  by
December 2003 and issue final  regulations  by December 2004. The future cost of
compliance with these regulations may be substantial.

          As a result of the Resource  Conservation and Recovery Act of 1976, as
amended,  and the  Toxic  Substances  Control  Act of 1976,  federal  and  state
hazardous  waste   regulations  have  been  promulgated.   Certain   fossil-fuel
combustion waste products,  such as coal ash, were exempted from hazardous waste
disposal  requirements  pending  the  EPA's  evaluation  of the need for  future
regulation.   The  EPA  has  issued  its  final  regulatory  determination  that
regulation of coal ash as a hazardous waste is  unnecessary.  In April 2000, the
EPA announced that it will develop  national  standards  regulating  disposal of
coal ash under its authority to regulate nonhazardous waste.

          The effects of compliance on the Company with regard to  environmental
matters  could have a material  adverse  effect on the  Company's  earnings  and
competitive  position.  These  environmental  regulations  affect the  Company's
earnings and competitive  position to the extent it competes with companies that
are not subject to such  regulations and therefore do not bear the risk of costs
associated with compliance,  or failure to comply,  with such  regulations.  The
Company believes it is in material  compliance with existing  regulations but is
unable to predict  whether  environmental  regulations  will change and what, if
any, the effects of such change would be.

     (D)   LEGAL MATTERS-

          Various  lawsuits,  claims and  proceedings  related to the  Company's
normal business operations are pending against FirstEnergy and its subsidiaries.
The most significant applicable to the Company are described above.

6.   RECENTLY ISSUED ACCOUNTING STANDARDS

          FASB  Interpretation   (FIN)  No.  45,  "Guarantor's   Accounting  and
          Disclosure Requirements for Guarantees,  Including Indirect Guarantees
          of Indebtedness of Others - an  interpretation  of FASB Statements No.
          5, 57, and 107 and rescission of FASB Interpretation No. 34"

          The FASB issued FIN 45 in January 2003. This interpretation identifies
minimum guarantee  disclosures required for annual periods ending after December
15, 2002. It also clarifies  that  providers of guarantees  must record the fair

                                       26

<PAGE>

value of those  guarantees  at their  inception.  This  accounting  guidance  is
applicable  on a  prospective  basis to  guarantees  issued  or  modified  after
December 31, 2002.  The Company does not believe that  implementation  of FIN 45
will be material but it will continue to evaluate anticipated guarantees.

7.  SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED):

          The following summarizes certain operating results by quarter for 2002
and 2001.

<TABLE>
<CAPTION>

                                             March 31,          June 30,        September 30,     December 31,
Three Months Ended                              2002             2002               2002             2002
---------------------------------------------------------------------------------------------------------------
                                                                      (In millions)
<S>                                          <C>                <C>              <C>                <C>
Operating Revenues........................   $ 124.3            $ 127.8          $ 131.9            $ 122.4
Operating Expenses and Taxes..............     109.2              106.3            113.1              116.9
---------------------------------------------------------------------------------------------------------------
Operating Income..........................      15.1               21.5             18.8                5.5
Other Income..............................       0.7                0.5              0.7                0.1
Net Interest Charges......................       3.8                4.0              3.7                3.6
---------------------------------------------------------------------------------------------------------------
Net Income................................   $  12.0            $  18.0          $  15.8            $   2.0
===============================================================================================================
Earnings on Common Stock..................   $  11.0            $  17.1          $  14.9            $   1.0
===============================================================================================================


                                             March 31,          June 30,        September 30,     December 31,
Three Months Ended                              2001             2001               2001             2001
---------------------------------------------------------------------------------------------------------------
                                                                      (In millions)
Operating Revenues........................   $ 128.4            $ 124.7          $ 121.3            $ 124.0
Operating Expenses and Taxes..............     112.4              101.8            118.7              110.3
---------------------------------------------------------------------------------------------------------------
Operating Income..........................      16.0               22.9              2.6               13.7
Other Income..............................       0.9                0.7              1.0                0.6
Net Interest Charges......................       4.5                4.6              4.3                4.0
---------------------------------------------------------------------------------------------------------------
Net Income (Loss).........................   $  12.4            $  19.0          $  (0.7)           $  10.3
===============================================================================================================
Earnings (Loss) Applicable to Common Stock   $  11.5            $  18.1          $  (1.7)           $   9.4
===============================================================================================================
</TABLE>

                                       27


<PAGE>


Report of Independent Accountants

To the Stockholders and Board of Directors of Pennsylvania Power Company:

In our opinion,  the accompanying  balance sheet and statement of capitalization
and the related statements of income,  common  stockholder's  equity,  preferred
stock,  cash flows and taxes  present  fairly,  in all  material  respects,  the
financial  position of Pennsylvania  Power Company (a wholly owned subsidiary of
Ohio Edison  Company) as of December 31, 2002, and the results of its operations
and its  cash  flows  for the year  then  ended in  conformity  with  accounting
principles  generally accepted in the United States of America.  These financial
statements   are  the   responsibility   of  the   Company's   management;   our
responsibility  is to express an opinion on these financial  statements based on
our  audit.  We  conducted  our audit of these  statements  in  accordance  with
auditing  standards  generally  accepted in the United States of America,  which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion. The financial statements of Pennsylvania Power
Company  as of  December  31,  2001 and for each of the two years in the  period
ended December 31, 2001 were audited by other  independent  accountants who have
ceased  operations.  Those  independent  accountants  expressed  an  unqualified
opinion on those financials statements in their report dated March 18, 2002.



PricewaterhouseCoopers LLP

Cleveland, Ohio
February 28, 2003

                                       28

<PAGE>


The following report is a copy of a report  previously issued by Arthur Andersen
LLP and has not been reissued by Arthur Andersen LLP.


Report of Independent Public Accountants

To the Stockholders and Board of Directors of Pennsylvania Power Company:

We have audited the accompanying balance sheets and statements of capitalization
of  Pennsylvania  Power  Company (a  Pennsylvania  corporation  and wholly owned
subsidiary  of Ohio Edison  Company) as of December  31, 2001 and 2000,  and the
related statements of income, common stockholder's equity, preferred stock, cash
flows and taxes for each of the three  years in the period  ended  December  31,
2001.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial position of Pennsylvania Power Company as
of December 31, 2001 and 2000,  and the results of its  operations  and its cash
flows for each of the three years in the period  ended  December  31,  2001,  in
conformity with accounting principles generally accepted in the United States.


                                       29


ARTHUR ANDERSEN LLP


Cleveland, Ohio,
   March 18, 2002.